Investors dump stocks after Fed's modest rate cut

By Kristina Cooke

NEW YORK (Reuters) - U.S. stocks sank on Tuesday after the Federal Reserve trimmed interest rates rather than slashing them, letting down investors who fear the economy might slip into recession unless the central bank becomes more aggressive.

Major indexes fell more than 2 percent after the Fed cut the benchmark fed funds rate for a third time to fortify the economy against a credit crunch and housing slump.

But the quarter-percentage-point cut, while expected, was considered modest while the accompanying statement failed to reassure investors that more cuts are coming.

The Fed also made a modest cut to the discount rate, which is the rate it charges to banks for direct, emergency loans, rattling those who had been expecting a decisive move to shore up credit markets.

Shares of large manufacturers and banks, including Boeing and Citigroup, both beneficiaries of lower interest rates, plunged after the Fed's decision.

Many traders were expecting a 50-basis-point cut, said Tim Biggam, lead option strategist at online brokerage thinkorswim, in Chicago.

"In addition, the Fed's outlook did not present a slam dunk case for a further rate cut, which led many traders to trim their long positions in stocks," Biggam said.

The Dow Jones industrial average slid 294.26 points, or 2.14 percent, to end at 13,432.77. The Standard & Poor's 500 Index dropped 38.31 points, or 2.53 percent, to 1,477.65. The Nasdaq Composite Index lost 66.60 points, or 2.45 percent, to 2,652.35.