With the latest cut--the Fed's thirteenth such move since 2001--the federal funds rate now stands at just 1.0 percent, a 45-year low. The funds rate is the interest banks charge one another for overnight loans.
The Fed also cut the discount rate by 25 basis points to 2 percent. The discount rate is what banks are charged by the Fed to meet their short-term funding needs.
"Recent signs point to a firming in spending, markedly improved financial conditions, and labor and product markets that are stabilizing," the Fed said in a statement. "The economy, nonetheless, has yet to exhibit sustainable growth."
Wall Street analysts had been divided on whether the Fed would adopt a smaller quarter-point drop or take more aggressive action. The speculation has become heated since last week.The vote to cut the federal funds rate by one-quarter point was 11-1. San Francisco Fed chief Robert Parry preferred a one-half point cut.
Reducing interest rates is a tool the Fed uses to spur economic activity. Lower rates make it cheaper for companies to finance their expansion plans and for consumers to borrow funds for big-ticket items.On the other hand, low rates can lead to inflation and also mean that consumers receive less return on their savings accounts and other investments.
In January of 2001, when the Fed began its most recent rate-cutting binge, the federal funds rate was 6.5 percent. It issued 11 cuts in 2001 and one in 2002, with the last reduction coming in November whento 1.25 percent.