Washington — The Federal Reserve delivered a half-point of interest-rate relief to the ailing economy Tuesday, citing "substantial risks" of prolonged weakness and signaling it would take further action if needed to stave off recession.
The latest reduction in the federal funds rate brought this key benchmark for short-term loans down to 5 percent following earlier half-point cuts on Jan. 3 and Jan. 31.
Still, Wall Street was not happy. Investors had been hoping rates would be cut by a bigger 0.75 percentage point, believing such a move was needed to boost badly shaken confidence after the Dow Jones industrial average suffered its worst sell-off in 11 years last week.
The Dow, which had been trading around the 10,000 level at the time of the Fed's midafternoon announcement, fell 238.35 to 9,720.76, its lowest close in two years. The Dow has now lost 1,137.49 over the past eight trading sessions and is down 17 percent from its record high in January 2000. The Nasdaq dropped 93.74 to close at 1,857.44, down more than 63 percent from its record close in March 2000.
Economists said Federal Reserve Chairman Alan Greenspan, who has worried since 1996 that the market was being driven higher by a speculative bubble, probably argued against a bigger cut for fear it would send the wrong signal to Wall Street.
"The Fed sent a strong message that their job is to counter economic weakness and not bail out battered stock investors," said David Jones, chief economist at Aubrey G. Lanston & Co. in New York.
Many analysts forecast that a fourth cut in the federal funds rate could occur within a matter of weeks if the economy remains weak.
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