In a rare and unexpected move, the Federal Reserve cut its benchmark interest rate by 0.75% early this morning in response to worldwide selling sprees that sent international stock markets plummeting yesterday.

The move is the biggest single reduction in interest rates since October 1984, and shows that the Federal Reserve now sees a recession in the American economy as a very real possibility.

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The Federal Open Market Committee lowered its federal funds rate on overnight loans between banks to 3.5% from 4.25%, and the Board of Governors approved a decrease in the discount rate to 4% from 4.75%.

Gold prices soared on the news, with one dollar currently buying 1/890 of an ounce of gold, compared with 1/871 of an ounce yesterday.

Today’s surprising rate cut did not dampen Wall Street’s expectations that the FOMC will slice the key rate by another 0.50% when it meets next week.

“The language in the accompanying statement did nothing to dissuade the expectation of more easing,” the American economist for JP Morgan, Michael Feroli, said in a research note.

The market refused to be comforted by the rate cuts, and after falling more than 400 points in early morning trading, the Dow Jones Industrial Average, recovered to a loss of 146.81 points to 11,952.49. The S&P 500 Index fell 15.72 points to 1309.47, while the Nasdaq composite Index dropped 51.04 points to 2,288.98. Markets rebounded slightly after several hours of trading, but were still down in mid-day trading.

“The committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth,” the Fed said in a statement. “While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households.”

Some economists welcomed the rate cut, but warned it could not stem further market declines.

“The economic data will continue to worsen; this move is not an instant fix,” the chief American economist at High Frequency Economics, Ian Shepherdson, said. “The economy is still staring recession in the face, but at least the Fed now gets it.”

Market experts also say yesterday’s woes in Asian and European stocks, and today’s stock sell off in America, highlight the global nature of the world’s markets.

“Many investors still believe that the credit crisis is purely a ‘U.S. subprime problem.’ Nothing could be farther from the truth, in our opinion,” an economist at Merrill Lynch, Richard Bernstein, wrote in a research note. “There appears to be a growing global credit pandemic.”

There is concern that cutting rates will be inflationary. Some economists are warning that this could backfire on the economy, and make it tougher for America to recover from the current slowdown.

“The rate cutting campaign, that we expect to continue until at least June, will put further downward pressure on the greenback,” the chief American economist for IDEAglobal, Joseph Brusuelas, said.

“The Fed went down several floors today, and likely will go down more before they’re through,” Mr. Feroli said. “We expect the committee to ease another 50bps when they meet next week, to be followed by a final 25bp cut in March, bringing the terminal fed funds rate to 2.75%.”