The Federal Open Market Committee of the Federal Reserve on Tuesday morning (Jan. 22) announced an emergency cut in its benchmark interest rates, shaving 75 basis points from its federal funds rate, which is now set at 3.5%, and 75 basis points from its discount rate, down to 4%.

The Fed was reacting to a worldwide stock selloff over the weekend and into Monday, which was a trading holiday in the U.S. U.S. stock market futures were showing the largest opening drop in history before the rate cut was announced; the markets opened down sharply, with the Dow Jones Industrial Average down 3.7%, the NASDAQ off 5% and the S&P 500 down 3.5% in the first five minutes of trading.

The markets recovered some of their losses by midday, and the trend held through the day. The Dow closed down about 1%, the NASDAQ down 2% and the S&P off 1.1%.

Builder stocks shot upward on news of the Fed cuts, with gains at the close ranging from a 12.5% gain for Avatar (NASDAQ:AVTR) to $44.28 on more than double normal volume to a 1.23% gain for Lennar, which is scheduled to report earnings later this week. M/I Homes (NYSE: MHO) shot up 10.7% to $10.24; Meritage (NYSE:MTH) was up 9.97% to $8.60. NVR (NYSE:NVR) was up almost 7% to $531.68, Centex (NYSE:CTX) climbed nearly 8.5% to $22.67; Pulte (NYSE:PHM) moved up 7.4% to $10.74; Hovnanian (NYSE:HOV) was up 8.3% to $6.54; KB (NYSE:KBH) rose 8.6% to $20.11; MDC (NYSE:MDC) rose 6.43% to $38.22; Ryland (NYSE:RYL) climbed 4.53% to $27.02; and Toll Brothers (NYSE: TOL) was up 4.6% to $18.09; and WCI rose 5.25% to $3.01. Dominion moved up on news that the company is going private and will offer 65 cents per share to shareholders of record; it was up a whopping 46.34% to 60 cents. Beazer (NYSE:BZH), however, was off a penny to $5.70; Sandard Pacfic (NYSE:SPF) down 2.25% to $2.17 and Orleans (AMEX:OHB) 1.87% to $3.15. The S&P XHB builder ETF, which includes more than a dozen builder stocks as well as supplier companies, was up nearly 7.85% to $18.55.

In its statement announcing the cuts, the FOMC said, "The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. 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."

The statement continued, "Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets." It concluded, "Appreciable downside risks to growth remain."

Wall Street is now expecting anouther 50-basis-point cut when the FOMC holds its regular monthly meeting next week.