Fed slashes interest rates, but stocks lose again

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(Agencies)
Updated: 2008-10-09 11:29

Paulson spoke after Asian and European markets wrapped up a bleak day, with investors fleeing stocks and worrying that neither the Fed nor other central banks could move fast enough to stop the turmoil, even considering the $700 billion US bailout of financial institutions.

European indexes ended lower, too. Britain's FTSE-100 finished down about 5.2 percent, Germany's DAX about 5.9 percent and France's CAC-40 6.3 percent.

In Asia, where trading ended for the day before the rate cuts were announced, the Japanese Nikkei 225 closed down more than 9 percent, Hong Kong's Hang Seng more than 8 percent.

In Britain, the government said it would pour cash into troubled banks in exchange for stakes in them, a partial nationalization.

"This is not a time for conventional thinking or outdated dogma but for the fresh and innovative intervention that gets to the heart of the problem," said British Prime Minister Gordon Brown.

Democratic US Sen. Charles Schumer suggested the United States take similar steps.

The Fed's interest rate cut was a change in course. It had held rates steady because of inflation concerns. Since the Fed had put a stop to interest-rate cuts in June, the economic outlook has deteriorated.

"The pace of economic activity has slowed markedly in recent months," the Fed said. "Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit."

Although inflation has been running higher, the Fed believes the recent drop in prices for oil and gas, and the weaker prospects for economic activity, have reduced the threat inflation poses to the economy.

The credit markets, which have been remarkably tight for weeks, showed only small signs of loosening. Rates on commercial paper, the short-term debt companies issue to raise cash for everyday expenses, went down. But the rate banks charge each other for loans went up.

The Fed also reduced its emergency lending rate to banks by half a percentage point, to 1.75 percent. Given the intense credit crisis, banks have been borrowing more under what is known as the discount window.

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