Fed cuts key interest rate in effort to fend off recession

The Federal Reserve cut a key interest rate for the first time in four years, seeking to prevent a steep housing slump and turbulent financial markets from triggering a recession.\nThe Fed announced Tuesday that it was reducing its target for the federal funds rate, the interest that banks charge each other, from 5.25 percent to 4.75 percent. The half-point reduction was double the quarter-point move that many economists had been expecting.\nThe action was designed to boost economic growth by lowering borrowing costs for millions of consumers and businesses. Commercial banks were expected to quickly match the Fed’s action by cutting their prime lending rate. The prime rate has been at 8.25 percent for the past 15 months.\nThe Fed’s action came in the midst of the worst slump in housing in 16 years. That downturn has triggered record defaults in subprime mortgages and roiled financial markets around the globe as investors have become worried about where the spreading credit problems will next appear.\nThe financial market turmoil represents the first major test for Fed Chairman Ben Bernanke, who took over from the venerable Alan Greenspan in February 2006.\nIn addition to cutting the federal funds rate by a half point, the central bank also reduced its discount rate, the interest it charges in making direct loans to banks, by a half-point.\nThe Fed also cut the discount rate on Aug. 17 as it scrambled to respond to the growing credit crisis.\nIn explaining its action Tuesday, the Fed said that “the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth \nmore generally.”