Fed cuts key rates three-quarters of a point

However, there has been no apparent change in the stance of Bernanke and the majority of Fed members that at the moment the greatest threat to the economy is from a possible recession, which may have already started, rather than from inflation that might be kindled by low rates.

“The Fed’s statement signaled that the risks still are very much on the downside and they are willing to do whatever is necessary to make sure the economy doesn’t slide away,” said Mark Zandi, chief economist at Moody’s Economy.com.

In explaining its actions, the Fed said that it was having to navigate a difficult policy environment that included sluggish economic activity and rising inflation pressures. It said anew that it was prepared to take further actions.

“Financial markets remain under considerable stress and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters,” the Fed said in its statement.

In Jacksonville, Fla., Tuesday, President Bush said the government will take further action — if necessary — to help the sagging economy.

The spectacular fall of Bear Stearns has raised concerns about what other banks might fail as a result of multibillion-dollar losses that began last year with rising defaults on subprime mortgages, loans made to borrowers with weak credit histories. However, two investment banks, Lehman Brothers Inc. and Goldman Sachs Group Inc., reported better than expected first quarter results on Tuesday, easing market worries.

Stocks had already been up strongly Tuesday before the Fed action. After the interest-rate cut was announced, stock prices slid lower as investors digested the fine print, then the buying resumed in earnest.

The purchase of Bear Stearns by JPMorgan Chase & Co. was helped by a pledge from the Fed that it would supply a $30 billion line of credit to back up Bear Stearns’ assets.

That offer was the latest in a number of unconventional moves the central bank has made, including employing Depression-era procedures to pump cash into the financial system.

In addition to providing support for the Bear Stearns sale, the Fed also announced Sunday one of the broadest expansions of its lending authority since the 1930s, saying it would allow securities dealers for at least the next six months to borrow directly from the Fed. That privilege had been confined to commercial banks.

In other moves, the Fed last week announced that it would lend up to $200 billion of Treasury securities that it owns to investment banks starting March 27 for a period of up to 28 days in return for a like amount of the investment banks’ shunned mortgage-backed securities. The Fed also announced recently that it was boosting the size of special loans it has been making since December to commercial banks.

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