The last time that the US Federal Reserve cut interest rates by three quarters of a percentage point or more in one go was in August 1982. Back then the global economy was enveloped in a thick cloud of misery. Total US economic output had fallen by 7.5 per cent over the previous year and unemployment had risen to its highest level since the Great Depression.

The last time the Fed cut rates at an emergency meeting outside its regular schedule of policymaking gatherings was on the first day that markets resumed trading after the September 11 terrorist attacks. Markets had been closed for four straight days and the fear of dislocation caused by the attacks forced the Fed to cut rates to stave off what many feared would be a global financial and economic panic.

Yesterday the Fed uprooted both of those landmarks. It cut its key federal funds rate at a hastily convened emergency meeting by three quarters of a point to 3.5 per cent.

Putting yesterday’s almost unprecedented move in this historical context gives some idea of the concern at the US central bank about the outlook for the economy. But the timing of this extraordinary rate cut also raises a serious question for the Fed’s credibility: did the leadership of the world’s most powerful central bank panic in response to a financial market crisis?

Only six weeks ago, at the last regular meeting of its Federal Open Market Committee, the Fed seemed relatively unfazed by the proliferating evidence of economic weakness caused by the continuing credit crunch. At that meeting Ben Bernanke, the Chairman, and his colleagues explicitly rejected the pleas of many in financial markets - and one of their own committee members – for a more aggressive response. They cut rates by just a quarter-point. Since then, of course, the economic picture has darkened considerably – with further stagnation in the labour market, in consumer spending and in housing.

But all of this has been known for at least the past week or so. The Fed’s next regularly scheduled meeting is only a week away, and recent comments by Mr Bernanke had indicated that the Fed was going to cut rates then – by at least half a percentage point. So why move yesterday?

The most troubling possible explanation for yesterday’s decision is that Mr Bernanke may have been trying to use monetary policy to avert a financial meltdown yesterday after the global equity collapse on Monday. US markets were closed on Monday, increasing the likely selling pressure on Tuesday and, while it is unlikely that the rate cut was a direct attempt to shore up equity markets, a really steep fall in stock prices would only further weaken confidence. Since the Fed was ready to act anyway next week, why not bring the expected cut forward and head off a financial bloodbath?

If that was what the Fed was thinking, it may have staved off one crisis but opened the door to a bigger one. As of yesterday afternoon, the dramatic rate cut certainly seemed to have had some positive effect. Equities retraced huge losses in the early morning.

But there is a real danger that Mr Bernanke is now held hostage to the panics of jittery financial markets. Traders have already fully priced in another 50 basis point cut in rates next week. If the Fed doesn’t deliver – if yesterday’s move merely brought forward a planned cut - the disaster averted yesterday will presumably merely have been delayed by a week as well. And with Mr Bernanke and his colleagues now into the traditional purdah period that begins a week before their next Open Market Committee meeting, it will be difficult for them to correct market expectations in advance.

A better explanation for the Fed’s highly unusual move yesterday is that Mr Bernanke simply wanted to magnify the scale of the monetary easing needed to bolster the ailing economy. By moving yesterday he gets two big bites out of the fed funds rate - 75 basis points this week and 50 next – before the end of January.

The problem is that, even if that was the reason for yesterday’s decision, Mr Bernanke is going to have a hard time dispelling the notion that he did not engineer the Fed’s biggest interest-rate cut in a generation primarily in response to a swoon in equity markets.

Whatever his real intentions, the world’s most powerful central banker looks like he has been forced into a hurried decision by panicked global equity traders.

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