The widely expected Fed action lowered the federal funds rate charged on overnight loans between banks to 1.75 percent, the lowest in 40 years. It was the 11th rate reduction by the U.S. central bank this year, aimed at boosting consumer and business confidence with unemployment at a six-year high.
In a statement explaining the decision, policymakers said economic risks remained tilted toward weakness, implying they will cut rates again if necessary even though - according to one measure of inflation - the real rate now stands below zero in inflation-adjusted terms.
The central bank said it saw signs the weakness in demand was abating but that these were "preliminary and tentative."
The fed funds rate is the U.S. central bank's key tool for setting the nation's monetary policy and signals the direction it wishes business and consumer lending rates to follow.
The Fed also lowered its more symbolic discount rate by a matching quarter percentage point to 1.25 percent.
Most economists believe the rate-cutting cycle is at or very near an end and that a recovery will begin in the first half of next year. Rates however may stay low for some time since the rebound is not expected to be a robust one.
The Fed's rate-cutting effort has been an attempt to bolster an economy already weak before the Sept. 11 attacks and seen in danger of crumbling afterward. Policymakers have also been keen to add impetus to a few fledgling signs of recovery.
Tuesday's meeting was te eighth and final scheduled Federal Open Market Committee gathering of 2001. The Fed reduced rates at each of these and also lowered borrowing costs three times this year between scheduled meetings, starting Jan. 3, to address persistently weak economic conditions.
Analysts said policymakers were trying to keep consumer hopes for the future intact, since consumer spending fuels two-thirds of national economic activity.
"This is all about consumer confidence, not liquidity," said economist Sung Won Sohn of Wells Fargo & Co. in Minneapolis shortly before the decision. "I don't know anybody who's not buying a car or a house because of high interest rates."
The Fed's credit easing has reduced the federal funds rate by 4.75 percentage points in the past year. That is the most aggressive string of rate reductions in a 12-month period since 1981, when the central bank was trying to pull the country out of the worst recession since the Great Depression.
The Fed's actions this year were not enough to prevent the United States from falling into its first recession in a decade. The National Bureau of Economic Research recently declared that the recession began in March. The group said that without the terror attacks, the slowdown might not have been bad enough to qualify as a full-blown downturn.
One of the reasons the Fed has had the room to cut rates so aggressively is because inflation has remained under control.
The Bush administration, meanwhile, is pushing Congress to pass this year a package of tax cuts and increased government spending to revive the economy. The economic stimulus package, however, has been hung up in partisan wrangling.
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