U.S. Cuts Key Rate by 3/4 Point

WASHINGTON -- The Federal Reserve slashed a key U.S. interest rate by three-quarters of a percentage point on Tuesday, a substantial cut, but smaller than many in financial markets had expected, as part of an effort to hold off a deep recession and financial meltdown.

The Fed's action, taken on an 8-2 vote of its policy committee, took the bellwether federal funds rate down to 2.25 percent, the lowest since February 2005. Financial markets had largely priced in a full point reduction.

"Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters," the central bank said in a statement outlining its decision.

The Fed also said downside risks to economic growth remained even in the wake of the rate cut, suggesting an openness to a further lowering of borrowing costs if needed.

Two Fed officials dissented, however, preferring less-aggressive action. Still, most policymakers seemed to be counting on inflation to subside, partly because they expect unemployment to rise.

"The committee expects inflation to moderate in coming quarters, reflecting a projected leveling out of energy and other commodity prices and an easing of pressures on resource utilization," the Fed said.