It slashed key interest rates by 0.75 percentage point to 3.5 percent, marking the first such cut between regularly scheduled meetings since just after the September 11, 2001 terror attacks on the World Trade. Bonds jumped sharply, with two-year notes falling to their lowest in nearly four years, as investors prepared for still more rate-cutting.
Investors remained sceptical whether the actions would be enough to prevent a worsening US economic outlook and a steep retrenchment in corporate profits, even after US equities recovered sharply from the day's worst losses. "It's the Fed coming to the realisation the economy is moving lower, quicker, (and) that the credit environment has not been fully flushed out," said Joseph Battipaglia, market strategist at Stifel Nicolaus. "It's not going to necessarily turn this market around."
The Dow Jones industrial average was down about 90 points or 0.7 percent, while the S&P 500 fell 11 points or 0.85 percent. But the market recovered from a much steeper early selloff that took the Nasdaq down as much as 5 percent and shaved 450 points from the Dow.
European markets, meanwhile, recovered sharply after wide losses starting on Monday when US markets were closed for the Martin Luther King holiday. The pan-European FTSEurofirst 300 index ended 1.9 percent higher at 1,304.37 points, snapping a five-day losing run.
"There is hope that the rate cut will help stabilise banks' operational businesses," said Markus Steinbeis, head of European equities at Pioneer Investments. Markets world-wide were gripped by waves of selling on Monday and early Tuesday which hit Asian equities particularly hard. Hong Kong's Hang Seng index lost $321 billion of its value in just the past two days.
"There's so much panic out there right now, I'm not sure it (the Fed rate cut) will help," Kim Rupert, managing director of global fixed-income at Action Economics in San Francisco as the downturn hit markets. Traders expect the Fed to cut rates even further at its next scheduled policy meeting next week, leading to a big drop in the dollar against the euro, as the prospect of much lower rates in the United States made European assets look even more attractive.
"Current events remain solidly dollar-negative," said Alan Ruskin, chief international strategist at RBS Greenwich. "Plainly, the Fed realised that to try stay ahead of the market they had to act immediately. It smacks of panic."
Emerging market stocks also recovered from the extreme selling of the prior session. Brazil's Bovespa surged 4 percent as lower benchmark rates boosted the appeal of developing countries' higher-yielding securities.
In energy markets, oil cut some of its losses to trade around $89 a barrel on Tuesday after the Fed's action. US crude was trading at $89.30, down $1.21. Investors had been gloomy in the oil patch that a sagging US economy would cut demand for energy.