WASHINGTON - Bowing to growing concerns about a deep recession and the remarkable declines on Wall Street, the Federal Reserve lowered its benchmark interest rate by half a percentage point on Wednesday, tapping its most visible policy tool to free up more money for banks and businesses.
The move brings the Federal funds rate to 1 percent. While Fed policy makers now have less room to maneuver on interest rates if the economy deteriorates further, investors had been hoping for the relatively aggressive cut as a sign of vigilance among American central bankers seeking to restore the free flow of credit. The move brought the rate down to near the lows reached in 2003 and 2004.
But the economic outlook is much grimmer than it was in 2003. Back then, policy makers were trying to vanquish the last remnants of a downturn.
This time, policy makers face an economy that is sputtering on all fronts - consumer spending, job creation, business investment, housing and possibly even exports - and the downturn has only begun.
The Federal Reserve is within striking range of reducing the overnight lending rate to zero, a point that Japan reached in the 1990s and remained at for years while it struggled to revive its economy.
If the Federal funds rate were to reach zero, the Fed would not be out of tools for stimulating the economy. But it would have to resort to unconventional tools that it has never used before. Instead of trying to reduce rates on overnight loans between banks, for example, it might start buying longer-term Treasury securities in order to push those rates down.
The Fed's biggest weakness at the moment is that the economy's problems have less to do with interest rates than the reluctance of banks and financial institutions to lend money. Even though the Fed has loaned out almost $600 billion to financial institutions in the last month alone, banks are still reluctant to lend to businesses or consumers.
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