Stocks dive on worries of US recession; Wall Street unassuaged by Fed's interest rate cut

Wall Street plunged at the opening of trading Tuesday, propelling the Dow Jones industrials down about 300 points after an interest rate cut by the Federal Reserve failed to assuage investors fearing a recession in the United States.

U.S. markets joined stock exchanges around the globe that have fallen precipitously in recent days amid concerns that a downturn might spread around the world. U.S. bonds were mixed, with investors seeking safer investments as stocks plummeted. The price of oil, meanwhile, fell amid expectations that a downturn would depress demand for energy.

The Fed's decision to cut its federal funds rate to 3.50 percent and the discount rate, the interest it charges to lend directly to banks, came a week before the central bank's regularly scheduled meeting, a sign that the Fed acknowledges that the world's financial situation is serious.

Whether the central bank's move was sufficient, though, was up for debate on Wall Street, where anxiety has been escalating that an interest rate might not be enough to prevent a recession.

"The market is saying we're still behind the eight ball here," said Harry Clark, president of Clark Capital Management in Philadelphia. "It's just not enough yet. The Fed has got to do a lot more than just lower rates. They've got to inject more liquidity."

In mid-morning trading, the Dow was down 243.22, or 2.01 percent, at 11,856.08. The Dow was last below 12,000 in March 2007.

The broader Standard & Poor's 500 index was off 26.76, or 2.02 percent, at 1,298.43, while the Nasdaq composite index fell 60.81, or 2.60 percent, to 2,279.21.

It was the first time the Fed altered the target federal funds rate between scheduled meetings since the markets reopened after the Sept. 11, 2001 terrorist attacks. The cut was the biggest one-day rate move by the Fed since it lowered rates by a full percentage point in December 1991, when the country was trying to emerge from recession.

The Fed said in a statement that it took the steps to address a "weakening of the economic outlook" and "increasing downside risks to growth." The bank also said it will act in a timely way to address future risks.

"They seemed to react to the markets rather than anticipate the markets, but they did the right thing," said economist Edward Yardeni, who runs his own research firm.

It's been a dark year so far for stocks. The S&P 500 index, the broadest measure of the stock market, has suffered its worst annual start ever, giving up about 13 percent in just three weeks. The Dow is down about 12 percent since the beginning of the year, and the Nasdaq is down approximately 15 percent.

The yield on the benchmark 10-year Treasury note, which moves opposite its price, sank to 3.53 percent from 3.63 percent late Friday. Crude oil prices fell $2.34 to $88.23 a barrel on the New York Mercantile Exchange on the concern that a weak economy will dampen energy demand.

The dollar fell against most other major currencies except the yen, while gold _ despite its historical status as a safe-haven investment _ also slid.

The prospect of a U.S. recession dragging down other economies around the world has infected the global markets, which plunged on Monday when Wall Street was closed for Martin Luther King Jr. Day.

In Asia on Tuesday, Japan's Nikkei stock average closed down 5.65 percent _ its biggest percentage drop in nearly a decade. Hong Kong's Hang Seng index lost 8.65 percent a day after showing its biggest losses since the Sept. 11, 2001, attacks.

Last week, each of the major U.S. indexes cascaded lower as investors grew skeptical that plans by U.S. lawmakers and President George W. Bush to stimulate the U.S. economy will keep the U.S. from tipping into recession. The plan Bush announced Friday, which still needs Congressional approval, outlines $150 billion (euro103.5 billion) in tax relief to help spur consumer spending.

One reason Wall Street is so terrified about the economy is because its own financial muscle has atrophied. The banking industry in the second half of 2007 watched its portfolios shrink by some $135 billion (euro93.1 billion) because of losing bets on mortgages. Just Tuesday, Bank of America Corp. posted a 95 percent drop in fourth-quarter profit, and Wachovia Corp. reported that its fourth-quarter earnings dove 98 percent.

Last year, the prime worry was the tight credit markets; now, the bigger concern is the average American struggling to make his debt payments. Consumer spending drives about two-thirds of the U.S. economy.