Stocks plunge despite Fed cut

NEW YORK — The opening bell hadn't even sounded on Wall Street when the Federal Reserve announced an emergency interest-rate cut. The Dow Jones industrial average fell 465 points — including 300 in the first minute — then rebounded to finish down a more bearable 128.

The recovery Tuesday was a victory of sorts for a battered market. But a long-term comeback may depend on factors much more difficult to achieve — a turnaround in the housing market and renewed confidence among U.S. consumers, who hold up most of the economy.

The alarming early drop in U.S. stocks followed the lead of markets abroad, where investors fled stocks and sent indexes plummeting on fears of a U.S. recession that could spread to other global economies.

By the close, the Dow had recovered to a loss of 128.11, or just over 1 percent, at 11,971.19.

Before trading began, the Federal Reserve moved to slash its benchmark federal funds rate by 0.75 of a percentage point to 3.5 percent. It was the widest cut since 1990, the beginning of what the Fed says is a comparable period in the way it handled the rate.

The Fed cut the discount rate, the interest rate the Fed charges banks directly, to 4 percent, also a three-quarter-point cut.

Many traders had anticipated a rate cut, but it was unusual for the Fed to make the call between regularly scheduled meetings of its policy-making Open Markets Committee.

The next meeting is a week away, and even then, most traders were expecting a cut of only a half-point.

The market pulled back a bit from its steep plunge — the Dow had fallen 277 points on Tuesday of last week, and 307 on Thursday. It was a positive sign, but economists and analysts said a full recovery was not likely in the near term.

"This is a cure for the wrong disease. It makes everybody feel good, but it's not going to have any ongoing benefit," said Daniel Alpert, managing director of Westwood Capital LLC. "We need to get ourselves out of a mountain of debt and overvalued properties."

The markets worry that consumers, who account for two-thirds of economic activity, are not in a position to spend the country back into solid growth. They have been cutting back rather than borrowing or spending more, even during the recent holiday season.

"People are up to their eyeballs in debt, and they're being asked to borrow more," said Mike Schenk, senior economist for the Credit Union National Association.