Following a string of recent weak economic reports, the Federal Reserve cut rates by 50 basis points, lowering the federal funds rate to 1.25 percent. The funds rate is the interest banks charge each other for overnight loans.
The Fed also cut the discount rate by 50 basis points to 0.75 percent. The discount rate is what banks are charged by the Fed to meet their short-term funding needs.
"Incoming economic data have tended to confirm that greater uncertainty, in part attributable to heightened geopolitical risks, is currently inhibiting spending, production and employment. Inflation and inflation expectations remain well contained," the Fed said in a statement. "In these circumstances, the committee believes that today's additional monetary easing should prove helpful as the economy works its way through this current soft spot."
Wall Street had largely anticipated a cut of only 25 basis points. Both before and immediately after the Fed's announcement, the Dow Jones industrial average and the Nasdaq composite index fluctuated around the break-even point.
Last year, the Fed issued 11 cuts that lowered rates to a 40-year low, but this year it has been reluctant to act. Wednesday's cut represents the first since December.
At its August meeting, the Fed indicated it was aware that leaving the rates unchanged would weight the risks "toward conditions that may generate economic weakness."
Interest rate cuts are designed to pump up spending by consumers and businesses. With lower interest rates, for example, people and businesses might buy more products, or invest in building homes or additional facilities and plants.
One analyst said the size and timing of the cut made it unlikely that more would follow.
"With this cut, the Fed basically is saying it is finished with cutting interest rates,? said John Ryding, chief economist for Bear Stearns. ?They think they have been accommodating with this cut and now the risks are neutral. It's their way of saying, 'We've helped the economy now and unless things change dramatically, we're done cutting rates.' "
Ryding added that despite the Fed's move, it will do little for boosting the struggling economy.
"It won't have an impact on the economy because it was not monetary policy that was holding things back," he said. "It won't bring mortgage rates down and auto loans are already down to zero interest. The only thing we may see is maybe it will bring interest rates on credit cards down slightly."