The Federal Reserve drop short-term interest rate from 1.5 percent to 1 percent.

The Federal Reserve cut a key short-term interest rate by a half-percentage point Wednesday and expressed continued worries about the damage being done to the economy by the ongoing crisis in the financial and credit markets.

The rate cut put the central bank's federal funds rate at 1%. That matched the lowest level for this overnight bank lending rate ever -- the last time it was at 1% was from June 2003 to June 2004.

Investors had been expecting a half-point cut and some were betting that the Fed would even cut rates by three-quarters of a point to 0.75%.

The Dow Jones industrial average, which had been higher ahead of the Fed's decision, turned lower shortly after the announcement.

The fed funds rate is used to set rates for a wide variety of consumer loans, including home equity lines and credit cards, as well as for many business loans. The lower the rate, the more the Fed hopes to spur economic activity.

The Fed said in a statement that it was concerned about the drop-off in consumer and business spending due disruptions in the credit markets and warned that the economic slowdown is likely to get worse.

"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 central bank said in its statement.

This is the ninth time that the central bank has lowered rates since September 2007 in an effort to deal with the problems in the U.S. economy and credit markets. The Fed also lowered its discount rate by a half-percentage point to 1.25%. That is the rate at which it lends directly to banks and Wall Street firms.

The Fed's last cut was an emergency half-point reduction on Oct. 8. Six other central banks around the globe also lowered rates that day in a coordinated move. The European Central Bank and the Bank of England are scheduled to meet next on Nov. 6.

While rate cuts are traditionally the key tool the Fed uses to stimulate the U.S. economy, it has had to take other steps to address the current credit crisis.

The Fed has loaned hundreds of billions of dollars to banks through a new lending facility and is starting to loan money directly to major businesses by purchasing commercial paper, which is what some banks and businesses use as their primary method to fund day to day operations.

In its statement, the Fed also appeared to concede that these actions would not lead to an immediate return of economic growth. The Fed projected improved credit markets and a return of moderate growth "over time." And it warned that "downside risks to growth remain."

Sphere: Related Content

Financial Crisis Still Taking Its Toll on Economy Says Ben Bernanke

Federal Reserve Chairman Ben Bernanke said today the financial crisis that has pounded the country — coupled with higher inflation — is taking a toll on the economy and poses a major challenge to Fed policymakers as they try to restore stability.

"Although we have seen improved functioning in some markets, the financial storm that reached gale force" around this time last year "has not yet subsided, and its effects on the broader economy are becoming apparent in the form of softening economic activity and rising unemployment," Mr. Bernanke said in a speech to a high-profile economics conference here.

While Mr. Bernanke welcomed the recent drops in oil and other commodities' prices, and believes inflation will moderate this year and next, the Fed chief also warned the inflation outlook remains highly uncertain.

The Fed, he said, would monitor the situation closely and will "act as necessary" to make sure that inflation doesn't get out of hand.

The current financial and economic environment is one of the most challenging to Fed policymakers "in memory," he acknowledged.

Given those dueling economic cross-currents— weak economic growth and higher inflation — many economists believe the Fed will leave rates where they are at its next meeting on Sept. 16, and probably through the rest of this year.

"They won't act until the coast is clear on financial stability and the state of the economy," the chief global economist at Decision Economics Inc., Allen Sinai, said. Many fear the economy will hit a rough patch later this year as the bracing effect of the government's tax-rebate checks fades.

Wall Street was buoyed by Mr. Bernanke's remarks, a dip in oil prices and growing speculation that Lehman Brothers Holdings Inc. could be sold. In afternoon trading, the Dow rose 135.49 to 11,565.70, the Standard & Poor's 500 index added 7.45 to 1,285.17, and the Nasdaq composite index rose 19.41 to 2,399.79.

The economy is the top concern for voters and of keen interest to presidential contenders Senators Obama and McCain, who are gearing up for their parties' conventions. Financial and credit problems are expected to smolder into next year. And, the unemployment rate, which jumped to a four-year high of 5.7% in July, is expected to keep rising.

The bulk of Mr. Bernanke's speech dealt with the need to bolster oversight of the nation's financial system to make it better able in the future to withstand future shocks.

To that end, Mr. Bernanke recommended that regulators work on ways to assess the health of the entire financial system, rather than the condition of individual banks, Wall Street investment firms or other financial companies — as is currently the focus.

"Such an approach would appear well justified as our financial system has become less bank centered," he said. "Some caution is in order, however, as this more comprehensive approach would be technically demanding and possibly very costly both for the regulators and the firms they supervise." He added that "stress tests" for a range of financial firms might also be helpful.

Mr. Bernanke's remarks come amid renewed worries on Wall Street about the financial health of Fannie Mae and Freddie Mac. The mortgage giants' stocks have gotten hammered this week as investors became increasingly convinced a government bailout is inevitable.

Although the Fed chief didn't mention the companies, he said one of the critical questions facing the country is how to strengthen the financial system and at the same time protect against "moral hazard," where financial companies might feel more inclined to gamble with risks because they believe the Fed or the government will ultimately bail them out.

"Some particularly thorny issues are raised by the existence of financial institutions that may be perceived as 'too big to fail,' and the moral hazard issues that may arise when governments intervene in a financial crisis," Mr. Bernanke said.

Mitigating that problem is another challenge facing policymakers, he said.

Mr. Bernanke repeated his call for Congress to provide new regulatory powers to insulate the economy from damage if a Wall Street firm collapses. He again urged Congress to give the central bank explicit authority to oversee systems that process payments and other financial transactions by investment firms and banks.

This year's Fed conference examines past and present financial crises, and the challenges confronting Mr. Bernanke and other central bankers as they try to help stabilize financial markets worldwide.

The Fed's handling of the credit, financial and housing debacles is likely to spur debate at the forum, which is sponsored by the Federal Reserve Bank of Kansas City and draws Fed policymakers, economists, academics and international central bank officials.

The Fed has taken unprecedented steps over the past year to battle the nation's worst credit and financial crises in decades.

To brace the wobbly economy, the Fed has slashed its key interest rate by 3.25% points, the most aggressive rate-cutting campaign in decades.

The Fed also has taken some unconventional — and controversial — actions to shore up the shaky financial system and to get credit — the economy's lifeblood — flowing more freely.

In the broadest expansion of its lending powers since the 1930s, the Fed agreed in March to let investment houses draw emergency loans directly from the central bank. As part of JPMorgan Chase & Co.'s takeover of Bear Stearns Cos., the Fed provided a $28.82 billion loan.

In July, the Fed said Fannie and Freddie also could tap the program. For years, such lending privileges were extended only to commercial banks, which are subject to stricter regulatory supervision.

Critics question whether taxpayers are being put at risk and if expanded safety nets will encourage financial companies to act more recklessly in the future.

But Mr. Bernanke today again defended the Fed's decisions saying they were needed to avert a financial catastrophe that could have plunged the economy into a deep recession.

Sphere: Related Content