Stocks down, but off lows

Wall Street trims some losses after a miserable start to the day on fears of a recession. Global markets plunge. Emergency interest-rate cut fails to soothe investors.

NEW YORK -- Stocks cut losses, but remained deep in the red Tuesday morning, after the Federal Reserve's emergency interest-rate cut failed to reassure investors worried about a recession.

The Dow Jones industrial average (INDU) tumbled more than 2 percent over an hour into the session, after opening down by more than 400 points.

The broader S&P 500 (INX) index, the Nasdaq composite both lost at least 2.5 percent. The Russell 2000 (RUT.X) small-cap index slipped 0.8 percent.

Stock investors have been clamoring for the Federal Reserve to either cut interest rates aggressively at next week's regularly scheduled meeting, or to hold an emergency meeting and cut rates early. Yet, the Fed's decision did little to soothe investors' fears and may have even exacerbated them.

"Even though this is what market participants have been screaming for, it may have shaken their confidence in the Fed's ability," said John Davidson, president and CEO at PartnerRe Asset Management.

"I think the inter-meeting cut frightened the market, making investors think that there must be something wrong if the Fed is going to do this, when it's not done very often in history," Davidson said.

Stocks were closed Monday for the Martin Luther King Jr. Day holiday, but futures indicated a brutal start to Tuesday's trade after international markets plunged on worries about a global slowdown.

That global market selloff prompted the Federal Reserve to hold an emergency telephone conference Monday night, and a decision to slash the fed funds rate was announced Tuesday.

The fed funds rate, a key overnight bank lending rate that effects all kinds of consumer loans, was cut by three-quarters of a percentage point, or 75 basis points, to 3.50 percent. There are 100 basis points in one percentage point.

The central bank also cut the discount rate, which effects bank loans, by 75 basis points to 4.0 percent.

In its statement the bank said it was making the move due to the weakening economic outlook and increased risks to growth. This was the first emergency interest-rate cut since September 2001, when the Fed cut interest rates in the midst of the recession and the panic following the 9/11 terrorist attacks.

Stocks have tumbled in 2008 so far on growing fears that the credit and housing market crises will send the economy into recession, if it's not already there.

One comfort had been bets that at least global growth was holding up and that it might offset the weakness in the U.S. economy. But the slumping global stock markets raised worries about slowing global growth.
Fed slashes key rate to 3.5 percent

Selling was broad based, with 25 of 30 Dow stocks tumbling. The biggest gainer was Home Depot (HD, Fortune 500), which rose 5 percent.

Treasury prices surged in a classic flight-to-quality, with the yield on the 10-year note falling to 3.54 percent from 3.65 percent late Friday. Treasury markets were closed Monday for the holiday. Treasury prices and yields move in opposite directions.

In currency trading, the dollar fell versus the euro and gained against the yen.

U.S. light crude oil for February delivery fell $3.32 to $87.25 a barrel on the New York Mercantile Exchange.

COMEX gold for February delivery fell $10.70 to $871 an ounce.