WASHINGTON (BBC) -- The U.S. Federal Reserve has cut interest rates to 3.5%, a shock three-quarters of a percentage point reduction.

Aimed at staving off a U.S. recession, the move failed to calm investors, with shares continuing to fall sharply as Wall Street opened for Tuesday trading.
The Fed, the U.S. central bank, said latest figures indicated a deepening of the country’s housing market slump and increased unemployment levels.
One analyst said the Fed was “obviously panicked” by the threat of recession.
“Unfortunately they have no power to reverse what in my opinion is the worst post-war recession,” said Michael Metz, chief investment strategist at Oppenheimer in New York.
The Fed’s interest move came as a complete surprise, as it was taken outside its timetabled rate-setting Open Market Committee meetings.
The last two such emergency cuts were on 17 September 2001, shortly after the attacks of 11 September, and on 3 January 2001, in the wake of the dotcom bust.
The last time the Fed cut rates as much as three-quarters of a percentage point was in August 1982, almost 26 years ago.
“This is huge,” said the BBC’s business editor Robert Peston.
“And it is a big risk. If this doesn’t work, then people will say they have nothing left in their locker.”
“The Fed is spooked by the markets, so no wonder the Fed felt it needed to take drastic action,” said the BBC’s economics editor Evan Davis.
“Even if it isn’t going to work as well as it did in 2000
[in response to the dotcom crisis], it might at least prevent markets and the economy driving themselves ever deeper in to a quagmire.”
Analyst Jeremy Stretch of Rabobank, described the Fed’s move as “a sign of panic”.
What if, after the Bernanke bounce, stock markets continue to fall?
“But it certainly indicates that the Federal Reserve wants to be seen as taking action over the concerns of an economic downturn,” he said.
Yet despite the Fed’s extensive cut in rates, US investment bank Merrill Lynch said at the start of this month that, in its opinion, the American economy was already in recession.
Another investment bank, Goldman Sachs, has also warned that recession is now likely.
The sharp downturn in the US economy has centered on the slump in the American housing market over the past year.
Against a backdrop of higher US mortgage rates, home loan defaults and repossessions hit record levels last year, specifically in the sub-prime sector.
This industry specializes in higher risk loans to people on low incomes or those with poor credit histories.
As the sub-prime mortgage sector hit crisis point, it triggered record losses at some of America’s largest banks.
It also caused the global credit squeeze, as much of this sub-prime debt was repackaged into wider debt offerings that were bought by banks and other investors around the world.
As a result, global banks are now much less willing to lend to each other, or to homes and businesses, until the full extent of the sub-prime exposure is known.