WASHINGTON — The Federal Reserve said Tuesday that it would become a lender of last resort to corporate America and signaled a possible interest rate cut, but the stock market nose-dived again as the financial crisis continued to defy the best efforts of policymakers.
Normally, even a hint of easier credit would have been enough to rally markets, especially when coupled with the Fed's apparently unprecedented decision to purchase as much as hundreds of billions of dollars of short-term corporate paper -- the loans that businesses count on to fuel daily operations but now have trouble obtaining because of the credit freeze.
But these are not normal times and, after a brief morning rise, the Dow Jones industrial average bumped steadily downward, losing 508.39 points, or 5.1%, to close at 9,447.11. The Dow has dropped more than 800 points in the last two days and nearly 1,700 points, or 15.2%, since the beginning of last week. The broader Standard & Poor's 500 index fell 5.7%.
Fed Chairman Ben S. Bernanke hinted that the central bank would consider an interest rate cut, perhaps before the next scheduled meeting at the end of the month.
But even as he promised to continue using all the power at his disposal, Bernanke offered a grim assessment of the road ahead.
"The heightened financial turmoil that we have experienced of late may well lengthen the period of weak economic performance and further increase the risks to growth," he said.
Meanwhile, acknowledging that the financial crisis was now affecting state and local governments, the White House announced that it had opened talks with local officials. "We're talking to states and reviewing the issue," White House spokesman Tony Fratto said.
California Gov. Arnold Schwarzenegger has asked the federal government to step in on behalf of states that face problems selling the bonds they use to raise operating funds until tax receipts are received. Massachusetts delayed the sale of $750 million in short-term notes for the second time in two weeks on Tuesday as turmoil in the credit market continued to undermine demand.
On Wall Street, traders said they feared that rescue efforts in Europe as well as in the United States would not ward off a bruising downturn in the overall global economy. Even with more cash available, they said, it will take some time for banks to fix their balance sheets.
