WASHINGTON (MarketWatch) -- Fearing that financial-market turmoil and a weak housing market could cause the economy to spiral downward, the Federal Reserve moved aggressively Wednesday for the second time in eight days to lower interest rates and signaled it was ready to do more as needed.
The central bank lowered the federal funds rate by 50 basis points to 3%. Financial markets were hoping that the Fed would decide to cut rates by this amount. The Fed has cut rates by 1.25 percentage points in eight days, almost unheard of in central banking history.
The Fed hopes that the aggressive rate cuts will help the economy weather a period of weakness marked by falling home prices brought on by the subprime credit crisis, weaker consumer spending, higher energy costs and softening job growth. The strength of the moves suggested to some that the central bank is concerned that the economic picture could get even darker in the short-term.
The Fed can't stop a downturn, but can help it be short and shallow rather than prolonged.
Some economists are worried that the central bank may be too late to rescue the economy from a long slump.
"Growth is clearly way, way, below trend. The economy, if not at a halt, is very close to it, and because of the state of financial markets, because of the state of housing and because of the credit crunch it could stay there for some time," said Ian Shepherdson, chief U.S. economist at High Frequency Economics, in an interview.
The Fed also announced that it was cutting its discount rate, the interest it charges on direct loans it makes to banks, by a half-point to 3.5%.
In a statement, the Fed said that downside risks to growth remain, and that it would act in a timely manner to address them.
"Financial markets remain under considerable stress, and credit has tightened further for some businesses and households," according to the central bank. "Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets."
Read the FOMC statement There was one dissenter: Dallas Fed President Richard Fisher said he did not think that the Fed should have lowered rates at all.
There was only a passing reference to inflation. The Fed said that it expects inflation to moderate in coming quarters, but also said it would watch the situation carefully.
The Fed has now cut rates five times by a cumulative 2.25 percentage points. Many Wall Street economists now think rates will have to go to 2.5% by spring to stave off a potentially serious recession.
The next two formal FOMC meetings are scheduled for March 18 and April 29 to 30.
Joseph Brusuelas, U.S. chief economist at IDEAglobal, said that the Fed statement was "a vast improvement" from previous efforts to communicate with the market. "The Fed signaled to the market that it realizes the severity of the problems in the financial system and the prospects for growth."
Past Fed statements had minimized the concern about the economic outlook.
"There was no waffling. The Fed didn't try to have it both ways. More rates cuts were clearly signaled," Brusuelas added.
In the past, many economists had viewed the FOMC statement as compromise language designed to appeal to both hawks and doves on the panel. The FOMC appears now to be moving away from this approach. Some Fed watchers believe Fed Chairman Ben Bernanke is asserting his leadership over the policy-making panel.
Economists detected some effort by the Fed to cool expectations that the Fed would slash interest rates in coming months.