Fed sees weaker economy, cuts rates

WASHINGTON -- The Federal Reserve on Wednesday slashed interest rates a half-percentage point, a move intended to blunt the pain of an economy that has "slowed markedly."

Fed Chairman Ben Bernanke and his colleagues, voting unanimously, cut their target for short-term interest rates to 1%, the lowest since June 2004.

In their post-meeting statement, Fed policymakers pointed to a drop-off in consumer and business spending, and industrial production. They also said slowing economic activity abroad would sap demand for exports. Worsening 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.

The Dow Jones average fluctuated wildly after the midafternoon announcement, zigzagging higher, then dropping by more than 400 points in the last 15 minutes of trading. It ended the day down 74 points from the Tuesday close at 8,991.

The U.S. central bankers said they expected inflation to ease, a development that would leave room for further cuts. The Fed cuts rates to boost the economy and raises them to stem inflation.

Most economists say the U.S is in a recession and the best that central bankers can do is make the downturn less severe. The Fed's move is unlikely to have an immediate impact on lending. Jitters are keeping banks on the sidelines. "This was purely for psychological effect," says economic consultant Tucker Hart Adams.

Longer-term, low interest rates should foster borrowing and spending once credit markets thaw, helping the economy climb out of recession.

Credit card holders are unlikely to see interest-rate relief, as many have already reached a contractual "floor." Rates for home-equity lines of credit may fall, but such lines have been reduced or frozen for many borrowers. Long-term mortgage rates, meanwhile, aren't expected to be affected.

Savers may suffer. Average rates for certificates of deposit, already falling, will drop. However, many banks will continue to offer above-average rates to attract needed deposits, says Greg McBride of Bankrate.com.

The Fed last cut interest rates in an unprecedented, coordinated move with central banks around the globe on Oct. 8. Other central banks will likely follow the Fed's lead. China cut rates Wednesday for the third time in six weeks.

The Fed on Wednesday also opened up so-called swap lines with foreign central banks in Brazil, Mexico, South Korea and Singapore to keep dollars flowing abroad.

Contributing: Sandra Block