NEW YORK - An emergency cut in interest rates by the Federal Reserve seemed to help restore some degree of calm in financial markets Tuesday, after a plunge in global stocks the day before revealed just how badly the subprime-mortgage crisis and the possibility of a U.S. recession have damaged investor confidence.

But analysts believe that such a shot in the arm will have to be tested over the next few weeks. "In the interim, this either works and we find a bottom, or the Fed is going to come back,'' said Jim Paulsen, chief investment officer at Wells Capital Management.

"In the end, the (economic) data are going to rule this thing. Either we are in a recession and we'll be right to be selling off, or not, and then the move was overstated.''

The central bank cut its key rate by an aggressive 75 basis points to 3.5 percent Tuesday, citing a "weakening economic outlook and increasing downside risks to growth.''

"The Fed is responding to an economy and financial system going into cardiac arrest,'' wrote Scott Anderson, senior economist at Wells Fargo, in a note. "The timing of the cut was surely meant to help shore up investor confidence, at a time when global stock markets have joined the U.S. market in pricing in an economic recession in the United States.''

On Monday and early Tuesday, plunges in Asian and European stocks led these markets to technically enter "bearish'' territory, having lost nearly more than 20 percent from their 2007 highs.

But following the Fed's move, U.S. and European trading seemed to have stabilized some.

After plunging nearly 500 points at the open Tuesday, the Dow Jones Industrial Average finished at 128. European stocks also seemed to regain some ground after swooning along with Asian markets on Monday.

A number of factors were attributed for the slide Monday, including disappointment over the Bush administration's stimulus proposal for the U.S. economy and concerns that U.S. bond insurers Ambac Financial Group and MBIA Inc. might default on their obligations.

Answers to economy questions

By McClatchy Newspapers

WASHINGTON - With the market dropping, the economy softening and prices spiking, it's an unsettling time for most Americans. Here are some answers to key questions consumers face:

Q. What should I do to protect my 401(k) and other investments in light of the stock market turmoil and sour economy?

A. There are several things to remember: Stock market investors should be in it for the long haul, about 10 to 15 years, said Barbara Roper, the director of investor protection at the Consumer Federation of America. Investors shouldn't try to respond to every bit of market upheaval by "reshuffling'' their portfolios. That said, the current market volatility presents a good time to do a financial checkup to see whether your investment portfolio is too risky or you have more invested than you can afford, Roper said. Those decisions should be based on your own financial circumstances and investment goals. It's also a good idea to contact a fee-only personal financial adviser to help make those decisions. Fee-only financial planners are paid solely by client fees and don't accept commissions or compensation from other sources.

Q. Will my credit cards and other interest rates fall after today's action by the Fed?

A. Yes. Cutting the target for the federal funds rate to 3.5 percent means that the prime rate will fall by an equal amount, to 6.5 percent. Since most Americans have variable-rate credit cards that are tied to the prime rate, interest rates on those cards will drop in the coming weeks along with interest rates on home equity lines of credit. How much they drop and how soon depend on the issuer. Many card issuers limit interest rate declines to a certain level.

Q. What about my mortgage?

A. The Fed's action doesn't affect existing fixed-rate mortgages. The interest rates on new fixed-rate mortgages generally are tied to inflation and the yield on long-term bonds, and both of those reflect conditions in the general economy. Consumer inflation last year was 4.1 percent - the highest in 17 years - and the economy faces the threat of recession, suggesting that fixed mortgage rates may rise rather than fall.

For homeowners with adjustable-rate mortgages, the Fed's move is a mixed bag. There will be little immediate impact for existing ARMs that reset based on the London Interbank Offered Rate or on an index of Treasury securities. For homeowners with ARMs that reset off one-year Treasury bills, the rate has dropped to 5.25 percent from 7.5 percent last summer and could fall further this year.

Q. Is this a good time to refinance my mortgage?

A. Yes, if you have good credit and the value of your home is holding steady. For homeowners with adjustable-rate mortgages, it's a particularly good time to refinance to a fixed-rate mortgage that can be locked in for years.

Q. What advice do you have for investors who aren't afraid to stay in the market?

A. Drew Tignanelli, the president of The Financial Consulate of Lutherville, Md., advises wealthy investors with considerable cash. Among that group, shrewd investors are considering buying commodity stocks, such as oil, gold, copper and agriculture. He also suggests that fast-growing Asian markets can outpace U.S. inflation. Consider mutual funds that invest in China, Korea, Taiwan, Hong Kong and Japan, Tignanelli said. Technology stocks, which probably will lead the way when a recovery occurs, also should be considered. Tignanelli said most technology companies had little, if any, debt and had lots of cash on their balance sheets. "In a credit crunch and in an inflationary environment, cash is king,'' Tignanelli said.

Q. Are other people as concerned about the economy as I am?

A. Definitely. A monthly survey of 15,000 consumers conducted by Discover Financial Services found that only 27 percent rated the nation's economic conditions as good or excellent, a new low for the survey. Consumers who rated the economy as poor rose to 36 percent, a new survey high. Those who planned to spend less in January reached 24 percent, compared with 11 percent in December, the survey found. More people planned to cut discretionary personal spending, household improvement expenses and major personal expenses in January. Investing and saving were the only areas to which consumers planned to contribute more money.