Jan. 28 (Bloomberg) -- When the U.S. Federal Reserve surprised the markets with a 0.75-point reduction in the federal funds rate last week, it did something unprecedented.

Ever since the Fed began announcing changes in its policy stance in February 1994, it has been rare for the central bank to move between regularly scheduled Open Market Committee meetings. Yet even in those moments when it did take emergency action, the Fed never reduced rates by as much as it did on Jan. 22.

This outsized and surprising move has elicited some criticism that Chairman Ben Bernanke's Fed is overreacting. Barry Ritholtz, chief executive officer of Fusion IQ, told CNN last week: ``The Fed's mandate is to maintain price stability and promote economic growth, not backstop the equity markets. That's not their responsibility, but it seems to be what they're doing.''

Is the Fed using a new playbook? Let's look back at previous emergency actions.

The first inter-meeting move in the modern and more transparent era was on April 18, 1994, when the Fed increased its benchmark rate a quarter of a point in response to rising inflation fears. The Fed presumably felt called to action by exceptionally high automobile sales and by a report that showed the rapidly expanding economy had added a whopping 456,000 jobs the previous month.

Financial Crisis

The next emergency move was on Oct. 15, 1998, when the Fed cut rates a quarter of a point. This episode seems the closest analogy to today. It was the height of a serious financial crisis, with turmoil in Asia and Russia, and domestic markets shaken by the near collapse of hedge-fund Long-Term Capital Management LP.

Speculation abounded that the problems at Long-Term Capital were merely the tip of the iceberg, and, adding fuel to that speculation, the day before the emergency cut, Bank of America Corp. reported $372 million in losses from its investments in the D.E. Shaw hedge fund. While there was much fear in the air, the economy wasn't all that bad. The unemployment rate was 4.6 percent in September, when a modest 69,000 jobs were added.

The next move occurred on Jan. 3, 2001, when in an unscheduled meeting two weeks before President George W. Bush's inauguration, the Fed cut the funds rate by half a point. The rate reduction was the first since November 1998, following a series of six increases.

Manufacturing Slides

At the time, there were few signs of the coming recession. The November jobs report indicated the economy was still growing. But then, from out of the blue, the National Association of Purchasing Management index recorded a massive drop, indicating that manufacturing activity had fallen to its lowest level since the 1990-1991 recession.

Economist Ian Shepherdson at the time said of the Fed, ``They saw the NAPM and it scared the pants off them.'' Looking back, it must have been that single data item that motivated the move. The rest of the economic information was favorable until March 2001, when, according to the National Bureau of Economic Research, the recession began in earnest.

The Fed followed that action with a second unscheduled move on April 18, 2001, when it cut interest rates a half-point. The central bank commented: ``Capital investment has continued to soften, and the persistent erosion in current and expected profitability, in combination with rising uncertainty about the business outlook, seems poised to dampen capital spending going forward.''

By then, the economy was in full retreat, with a March net job loss of 86,000.

Terror Strikes

The last emergency move was on Sept. 17, 2001, when the Fed reduced the federal funds rate by a half-point before the stock markets reopened in the wake of the terrorist attacks. The Fed attempted to preempt a worldwide financial crisis. Its statement acknowledged: ``Even before the tragic events of last week, employment production and business spending remained weak, and last week's events have the potential to damp spending further.''

With the economy already in recession, there was, at the time, widespread fear that the terrorist attacks and the associated collapse in equity markets, would push the U.S. toward depression.

Looking back on the Fed's performance, even a critic would have to concede that its history of emergency moves is stellar. Those actions have tended to come while the economic data are still fairly solid.

Good Timing

Even with that, the most recent prior action provided monetary stimulus just before the economy formally entered recession, and then doubled the dose when the economy responded slowly. In 1998, the Fed helped soothe markets at a time when financial risks seemed poised to push the economy into recession. It provided insurance against recession, and did so without lifting inflation.

The raw economic data today are a little better than they were in 2001, and a little worse than they were in 1998. Equity markets, on the other hand, are much worse than they were in 2001, and even worse than they were in 1998. Since actions in similar periods under similar conditions proved, in retrospect, to be propitiously timed, it is easy to justify more aggressive action this time around.

One can even say with confidence that Feds of the past would, faced with today's data, almost surely have acted in a similar manner.

One can only hope it works.

(Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He is an adviser to Republican Senator John McCain of Arizona in his bid for the 2008 presidential nomination. The opinions expressed are his own.)

To contact the writer of this column: Kevin Hassett at khassett@aei.org

Last Updated: January 28, 2008 00:25 EST