Shares plunged in New York last night after the Federal Reserve cut US interest rates by only a further, modest quarter-point, rattling global markets hungry for more aggressive action to shore up a vulnerable American economy.

The Dow Jones industrial average slumped by almost 300 points as blue-chip equities were hit by a vicious sell-off after the Fed confirmed a widely predicted verdict that saw its key Fed Funds target rate cut for the third time in four months, to 4.25 per cent.

The move failed to placate fretful investors, who had hoped that the US central bank would ease their fears over American prospects with more radical steps to counter a rapidly worsening credit squeeze and a still-deepening housing slump.

The Dow Jones industrial average closed down 294.20 points, or 2.1 per cent, at 13,432.80. The broader-based S&P 500 index of US blue-chip shares also tumbled, shedding 2.2 per cent, while the tech-laden Nasdaq ended down 2.3 per cent.

Stock markets in London and across Europe will reopen this morning braced for a fresh battering in the wake of Wall Street’s losses after disappointment at last night’s Fed decision was compounded when the US central bank coupled its limited reduction in rates with a hawkish statement reemphasising persistent inflation risks.

The Fed’s stance was seen by investors and analysts as a signal that its policy-making Federal Open Market Committee (FOMC) – and in particular a hardline faction of hawks on the FOMC – remains reluctant to be pressured by markets’ demands into guaranteeing the steeper cuts in US borrowing costs that some see as necessary to stave off a severe down-turn or recession.

In a further blow to investor sentiment, the Fed coupled last night’s quarter-point cut in the Fed Funds rate with an equally modest, matching reduction in the discount rate that it charges for direct loans to US banks needing emergency funds. There had been hopes that a resurgence of stress in US money markets in recent days would also trigger a half-point cut in the discount rate and perhaps also see the Fed lengthen the period over which it is prepared to lend, in an attempt to quell these strains.

There was only one dissenting voice in the rate-setting committee’s 9-1 vote, with Eric Rosengren, president of the Fed’s Boston arm, pressing the case for a half-point reduction in rates.

The FOMC, which has now cut the Fed Funds rate by a full percentage point since mid-September in an effort to underpin the US economy, insisted that its moves would still fulfil that aim. “Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time,” it said in a statement.

The Fed also acknowledged that credit market strains had intensified in recent weeks. However, it rattled investors by repeating its view that “some inflation risks remain”, and that the outlook for price pressures receding remained in doubt.

“Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation,” it said.

This marked only the faintest watering down of the Fed’s tough language in October, when it asserted that risks to US growth were “roughly balanced” by risks from inflation. In the aftermath of the statement last night, prices for US Treasury bonds jumped as equity markets’ disappointment triggered a renewed rush for safe havens.

Oil concerns

—A renewed surge in the price of oil added to the Federal Reserve’s worries over inflation

—Oil prices jumped more than 2.6 per cent to over $90 a barrel as a Midwest ice storm crippled parts of the most important crude storage hub in America

—The price was also supported by the Fed’s largely expected quarter-point cut designed to bolster the US economic outlook and in turn reinforce oil demand

—London Brent crude also traded up $1.90 to $89.94 a barrel

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