The central bank on Tuesday said it had reduced the federal funds rate, the interest that banks charge each other, to a range of zero to 0.25 per cent. That is down from the ONE per cent target rate in effect since the last meeting in October. Many analysts had expected the Fed to make a smaller cut to 0.5 per cent.

Going all out

Federal Reserve Chairman Ben Bernanke and his colleagues also pledged to use "all available tools" as they struggle to contain a financial crisis that is the worst since the 1930s and a recession that is already the longest in a quarter-century.

The Fed also made clear that it intends to keep the funds rate at extremely low levels.

"The committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time," the central bank's panel that sets interest rates said in a statement.

The Fed's decision is expected to be quickly matched by a reduction in banks' prime lending rate, the benchmark rate for millions of business and consumer loans. Before the Fed announcement, the prime rate stood at four per cent.

Unconventional methods

The Fed has never pushed its target for the federal funds rate as low as zero to 0.25 per cent. The lowest target rate before had been 1.0 per cent, a level seen only once before in the past half-century.

Given how low interest rates are, the central bank said it planned to use a variety of unconventional methods to flood the banking system with credit and drive interest rates lower.

"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability," the Fed said.

Meanwhile, the yield on the popular three-month T-bill - whose yield has at times gone negative due to frenzied buying - rose to 0.04 per cent from 0.02 per cent late Monday ahead of the Fed's decision.

On Tuesday, the 30-year bond fell below three per cent for a second day.

- AP