Fed delivers 3/4 point cut

By Mark Felsenthal and Christian Plumb

WASHINGTON/NEW YORK (Reuters) - The Federal Reserve on Tuesday slashed U.S. interest rates by a hefty three-quarters of a percentage point, giving a lift to a Wall Street already jubilant over stronger-than-expected investment bank earnings.

The Fed's action, taken on an 8-2 vote of its policy committee, was part of an intense effort by the central bank to avert a deep recession and financial market meltdown. The move took benchmark overnight rates down to 2.25 percent, the lowest since February 2005.

"Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters," the central bank said.

Even though the sizable cut was smaller than some Street had expected, it helped give a further lift to stock markets already rallying sharply on earnings news from Goldman Sachs Group Inc and Lehman Brothers Holdings Inc .

The Dow Jones industrial average hit a session high in the wake of the Fed's decision and was up about 370 points by late afternoon.

Goldman Sachs, which has largely avoided the mortgage-related losses that have plagued much of Wall Street, said first-quarter earnings fell by half as it recorded steep losses on corporate loans and other assets. Yet the results at the largest U.S. investment bank exceeded expectations.

Lehman Brothers, whose shares have been pummeled in recent days on concern it is the most vulnerable to troubled mortgages and leveraged loans next to Bear Stearns , suffered a sharp fall in bond trading revenue but benefited from rising merger advisory revenue.

RISKS REMAIN, READY TO ACT

In a statement outlining its rate move, the Fed said downside risks to economic growth remained even in the wake of the rate cut, suggesting an openness to a further lowering of borrowing costs if needed.

However, in the first double-dissent since September 2002, two Fed officials voted against the decision, preferring less-aggressive action. Still, most policy-makers seemed to be counting on inflation to subside, partly because they expect unemployment to rise.

"The Fed has shown that they are focused on getting the economy back on its feet first and foremost, and they will worry about inflation later," said K. Daniel Libby, senior portfolio manager at Sands Brothers Select Access Fund in Greenwich, Connecticut.

The rate action comes two days after the central bank announced up to $30 billion in financing to facilitate the sale of investment bank Bear Stearns, an unusual intervention bank officials said was necessary to prevent a domino-effect sequence of defaults in the financial system.

The Bear Stearns arrangement was the latest in a series of Fed emergency measures, some of them not used since the Great Depression, to ensure financial institutions have access to liquid funds and to stem a fast-spreading global financial crisis.

The Fed has now cut rates by an aggressive 3.0 percentage points since mid-September, including 2.0 points since the start of the year.

U.S. Treasury Secretary Henry Paulson earlier on Tuesday conceded the economy was in decline. "There's no doubt that the American people know that the economy has turned down sharply," he told NBC's Today show.

(c) Reuters 2008. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.

More US (Business) News click here