Fed Rejects Rate Cut, Global Markets Retreat amid Wall Street Turmoil

Citing concern over unstable inflation conditions, the Federal Reserve acknowledged Wall Street's current crisis but said risks of inflation and risks to growth compelled the institution to maintain the interest rate.

"Over time, the substantial easing of monetary policy, combined with ongoing measures to foster market liquidity, should help to promote moderate economic growth," a statement from Fed Chairman Ben Bernanke read.

Domestic markets sank after the Fed's decision, but soon recovered and even regained some of Monday's massive losses.

European markets posted a moderate drop on Tuesday, but Asian markets plummeted and the Russian stock exchange even suspended trading as global investors' fears continue to grow over the damaging effects from Sunday's Wall Street tumult.

Lending giant Lehman Brothers posted the largest bankruptcy in American history Sunday, while Bank of America announced plans to buy out investment banking firm Merrill Lynch.

Share trade on MICEX, Russia's most liquid exchange, suspended trade for one hour beginning at 4:42 p.m. after the largest decline since the Russian financial crisis 10 years ago. Its index fell 16.6 percent, Reuters reported.

Asian markets demonstrated similar panic. Markets in Tokyo, Hong Kong and Seoul were closed Monday for holidays but took steep drops upon opening Tuesday. Those Asian markets that were open Monday saw their second day of decline.

Asia's largest stock market, the Nikkei-225, dropped nearly 5 percent to 11,609.72 points, the lowest it's been in three years, the New York Times reported.

Kiichi Fujita, a strategist at Japanese brokerage firm Nomura Securities, said investors see that "the United States is in trouble, so they think everywhere else is also in trouble," according to the Times. "This sell-off won't stop until foreigners stop panicking."

Global investors kept a close eye on the moves of the U.S. Federal Reserve after Wall Street's sharp decline Monday -- the worst for the American markets since the day after the Sept. 11, 2001, terrorist attacks.

Stocks slid even further due to investor fears over strength of American International Group, an insurance agency built to protect investors from credit agency downgrades. AIG lost 46 percent Tuesday as consumer confidence plummeted.

On an optimistic note, U.S. consumer prices in August showed the first monthly decline in nearly two years, due to a relaxing of usually surging fuel prices.

August consumer prices were down 0.1 percent, compared to a 1.1 percent rise in June and a 0.8 percent hike in July, the Labor Department announced Tuesday.

Earlier Tuesday, speculation had been "building in the market that the Fed will move later to lower its crucial benchmark interest rate from its current level of 2 percent" given the progress made in consumer pricing, the New York Times reported.

Anticipation of a cut by the Fed, combined with aggressive fund injections from central banks, helped European markets slightly.

"Yesterday it looked like a Category 4 hurricane," Barclays Wealth equity strategist Henk Potts told the New York Times. "Today it looks more like a tropical storm -- still destructive but maybe not devastating."