Dow plunges, then rebounds, after Fed rate cut

NEW YORK -- The Dow Jones industrial average swung wildly Tuesday but rebounded from steep early losses after a surprise interest rate cut from the nation's central bank.

By noon. ET, the Dow was down about 180 points and was hovering in the 11,900 range. It fell more than 450 points within minutes of the opening of the New York Stock Exchange, then rebounded to a drop in the 55-point range, then began slipping again late in the morning.

Reacting to more signs of a weakening economy, the U.S. Federal Reserve earlier Tuesday made a surprise three-quarters of a percentage point cut to short-term interest rates before the open on Wall Street, a move that investors hope will help stabilize jittery financial markets.

The cut, which came before the Fed's meeting later this month, lowered the fed funds rate to 3.5% from 4.25%.

The tepid reaction of investors to the surprise cut may be due to a sense that the Fed senses the economy is in worse shape than it originally thought.

"By cutting 75 basis points ahead of their meeting, the Fed has sent some deep concerns in the hearts and minds of investors. The concern is economic conditions are worse than we believe," says Hugh Johnson, chief investment officer at Johnson Illington Advisors. "The surprise cut raises concerns as opposed to confidence."

In a brief statement, the Fed said it had decided to cut the federal funds rate "in view of a weakening of the economic outlook and increasing downside risks to growth." The Fed also said the "broad financial markets have continued to deteriorate."

At 8 a.m. ET, Treasury Secretary Henry Paulson tried to calm investors by talking to the U.S. Chamber of Commerce about the underlying strength of the economy and the Bush administration's willingness to work with Congress to quickly enact an economic stimulus package.

"Time is of the essence and the president stands ready to work on a bipartisan basis to enact economic growth legislation as soon as possible," Paulson said.

Although Paulson said he was confident about the "underlying strength of the global economy," the treasury secretary was blunt when it came to describing the current state of the economy.