Fed slashes key rate half a percentage point to 1.0%

WASHINGTON -- The Federal Reserve slashed interest rates a half-percentage point to the lowest level in more than four years Wednesday as policymakers try to limit the pain of an economic downturn.

Saying the economy had "slowed markedly," Fed Chairman Ben Bernanke and his colleagues cut their target for a key short-term interest rate to 1%, lowest since June 2004. Before then, rates had not been that low since 1958.

The decision to cut rates Wednesday was unanimous.

In their post-meeting statement, Fed policymakers pointed to a drop in consumer and business spending and industrial production. They also said slowing economies abroad would likely lead to a slowdown in exports, which have provided a significant boost to the U.S. economy.

"The intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit," the Fed said.

U.S. central bankers say they expect inflation to continue to ease, given falling prices for energy and other commodities. That could give them room to cut interest rates further.

The 1% federal funds rate target is what banks charge each other on overnight loans. The Fed also cut the discount rate, which it controls directly, to 1.25%. That is the rate it charges banks to borrow from the Fed's discount window.

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Lower interest rates should eventually encourage consumers and businesses to borrow money once the crisis in credit markets eases. That will help the economy recover as people buy homes, machinery, cars and other items, PMI Group chief economist David Berson says.

"It may not be spent initially," Berson says. But "liquidity is always eventually spent when it has been added."

The Fed's move is unlikely to have an immediate impact on lending as nerves are keeping banks on the sidelines, no matter the cost of money. "The issue is not lack of liquidity," says Tucker Hart Adams, owner of the Adams Group, an economic consulting firm.