Fed Cuts Rates by 1/2 Point

The Federal Reserve on Tuesday cut its key interest rates by half a percentage point in what may be its last move to help the U.S. economy out of its current recession.

The rate reduction brought the federal funds rate to 1.50 percent from 2.0 percent. That's the lowest target for short-term interest rates since 1961.

The rate reduction was larger than the quarter-point cut expected by Wall Street. A Reuters survey on Friday found top bond dealers were unanimous in expecting the Fed to push the U.S. benchmark rate for overnight bank lending down by a quarter point.

The action is the Fed's 11th cut this year as the central bank keeps trying to bolster an economy that was losing steam even before Sept. 11 but showed worrying signs of crumbling afterward.

To avert a full-blown downturn this year, the Federal Reserve had already slashed interest rates 10 times, beginning with five half-point cuts in the funds rate followed by two quarter-point moves on June 27 and Aug. 21, and by a two half-point moves on Sept. 17 and Oct. 2.

Eight of the 10 rate cuts since the start of the year have been aggressive half-percentage-point ones, including the last three, while two were smaller quarter-point reductions.

The Reuters poll of bond traders was conducted Friday after the U.S. Department of Labor reported the unemployment rate shot up to 5.7 percent — the highest in six years — from 5.4 percent in October. The economy shed a staggering 331,000 jobs, bringing total job losses over the past two months to 800,000, the largest total in 21 years.

All of the 24 primary dealers in U.S. government securities, who work directly with the Fed in the markets, forecast a quarter percentage point rate cut on Tuesday, up from 23 dealers in the last Reuters poll, which was conducted in early November before the United States was officially declared in recession.

Another 16 dealers said they expect a follow-up quarter percentage point cut at the Fed's January policy meeting and 16 dealers expect the federal funds rate to be 1.50 percent by mid-2002, up from 12 in the last poll.

Reuters and the Associated Press contributed to this report.