The US Federal Reserve slashed interest rates by 0.75 of a percentage point yesterday, its biggest single cut for almost a quarter of a century, amid mounting fears of a recession in the United States.
The cut, which followed huge losses on European and Asian stock markets on Monday, came as President George Bush called congressional leaders to the White House to discuss an economic stimulus package aimed at staving off a recession.
The emergency rate cut was the first to be announced between meetings of the Fed's Open Markets Committee since September 2001, in the wake of the 9/11 terrorist attacks. The biggest single cut since 1984, it brings the overnight rate that banks use to lend to one another down to 3.5 per cent.
The interest rate announcement came shortly before US markets opened after the Martin Luther King public holiday which saw them avoid the collapse in sentiment across Europe and Asia on Monday.
There was a mixed response from stock markets.
The Dow Jones plunged almost 500 points in the first few minutes after the opening bell yesterday but made up more than half of that loss in later trading. It closed at 11,971.19, down 128.11 points.
European stocks had an extremely volatile session. The FTSE Eurofirst 300 index broke a five-session losing streak to end 1.9 per cent higher, having earlier fallen more than 4 per cent to its lowest level since November 2005.
In Dublin, the Iseq Overall Index also recovered some of Monday's losses by the end of the session - closing 3.77 per cent higher - but only after another sharp fall when markets opened that brought its losses from last February's high to 40 per cent.
In London, the FTSE 100 finished with a gain of 2.9 per cent, although the Dax in Frankfurt failed to join in the party, closing 0.3 per cent lower.
The Taoiseach stressed yesterday the importance of not over-reacting to the sharp crash in international stock markets. Bertie Ahern said the Government was concerned but added that the economy was well equipped to deal with such volatility. "The Government and myself and the Minister of Finance ... are monitoring the situation very closely in order to assess the economic implications for us," he said yesterday.
In Brussels at the meeting of EU finance ministers yesterday, the Tánaiste, Brian Cowen, said it was too early to tell if the Irish economy would slip into recession as a result of the US economic downturn.
EU finance ministers warned that the US economic slowdown and ongoing turbulence on world stock markets would dampen economic growth throughout Europe. "Tensions in financial markets are still there. Our growth rates in 2008 will not be as high as we were expecting in November," said EU Monetary Affairs Commissioner Joaquín Almunia.
Mr Bush has proposed a $145 billion package of tax rebates for individuals and investment incentives for businesses to give the US economy a shot in the arm.
The White House yesterday said it had not closed the door on increasing the size of the stimulus package but the president said it was vital to take action as quickly as possible.
US treasury secretary Henry Paulson said he was keeping a close eye on market developments and had been conferring with his foreign counterparts on measures to restore calm to global stock markets.
With home repossessions rising as job growth and retail sales decline, the economy has moved to the centre of the US presidential elections and Democratic candidate Hillary Clinton yesterday blamed Mr Bush for the economic crisis.
It remains unclear what impact yesterday's rate cut will have on the deepening mortgage crisis in the US, which has seen lenders and investors writing off about $10 billion in losses so far, with more than two million home loans at risk, according to the Mortgage Bankers Association.