The reduction in the federal funds rate from 4.25 percent down to 3.5 percent marked the biggest reduction in this target rate for overnight loans on records going back to 1990. It marked the first time that the Fed has changed rates between meetings since 2001, when the central bank was battling the combined impacts of a recession and the terrorist attacks.

The Fed said it also was reducing its discount rate, the interest it charges to make direct loans to banks, by a similar three-quarters of a percentage point, pushing this rate down to 4 percent.

Commercial banks responded to the Fed's action on the funds rate by announcing similar cuts of three-quarter of a percent on their prime lending rate, the benchmark for millions of business and consumer loans. The action will mean the prime lending rate will drop from 7.25 percent down to 6.50 percent.