The Federal Open Market Committee, the reserve's policy-making body, made the drop to 5.5 per cent in the federal funds rate, the interest rate banks charge each other for overnight loans.
But Wednesday's decision will also affect other businesses and consumers because it will be reflected in interest rates for such items as corporate loans, homes and cars, making capital investments and consumer goods more affordable.
The drop, which had been widely expected, brought interest rates to their lowest level in 13 months.
The Fed's policymakers said their decision came after they determined that developments such as lower consumer and business confidence, higher energy prices, falling retail sales, decreasing capital investment and lower production have weakened the U.S. economy and threatened its growth.
"Taken together, and with inflation contained, these circumstances have called for a rapid and forceful response of monetary policy," the committee said in a statement, which caused analysts to predict more rate cuts in the future, including at the Fed's next meeting March 20.
Wednesday's decision came after the committee met for two days to access the U.S. economy in its first regularly scheduled meeting of 2001. During both days, pessimistic economic reports were released.
Wednesday's government report showed lethargy across the U.S. economy. The gross domestic product, the broadest gauge of growth in the U.S. economy, increased a mere 1.4 per cent in the fourth quarter of 2000, the slowest increase in more than five years.
That rate was lower than stock analysts' predictions, which were near the third quarter's 2.2-per-cent rate of growth. It also emphasized how quickly the U.S. economy is slowing after the second quarter's astounding 5.6-per-cent increase.
Federal Reserve Chairman Alan Greenspan warned Congress last week that he expects growth to slow even further, predicting growth "very close to zero" in the current quarter.
Consumers seemed to agree with Greenspan's assessment, according to Tuesday's report from a private research group, which said its consumer confidence index fell to its lowest level in four years after four consecutive months of decline.
To try to stave of fears of a recession, the Federal Reserve last cut interest rates January 3 during an unusual, unscheduled meeting, at which it also made a half-point cut.
The past two cuts were higher that typical interest rate drops, which generally come in more conservative quarter-point falls.
Just eight months ago, the Federal Reserve had taken the opposite action, finishing up six interest rate increases to slow what Greenspan had feared was an overheated economy that could bring on inflation.
The Fed's decision Wednesday was watched closely by investors, who liked the cut January 3, after which, the flailing Nasdaq Composite Index rose by 14 per cent, the Dow Jones Industrial Average was up by 3 per cent and the broad Standard & Poor's 500 Index increased by 5 per cent.
(dpa)
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