US Fed Cuts Rates Near Zero to Battle Slump, Dow Surges 4%

The Federal Reserve cut its target interest rate Tuesday to historic lows between zero and a quarter percentage point and said it could expand a program of unorthodox lending and securities purchases.

After two days of discussion among Fed officials, the central bank said it would use every weapon from its arsenal to lift the U.S. from recession. It began by reducing its target interest rate -- an overnight bank-lending rate called the federal-funds rate -- from 1%. Another Fed lending rate, the discount rate, will go to half a percentage point, a level last seen in the 1940s.

The cut was more than many economists expected, and the statement that came with it marked the latest signal by the Fed and its chairman, Ben Bernanke, that the central bank was prepared to take aggressive steps to revive the economy.

"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability," the Fed said in a statement. It added that it expected interest rates to remain "exceptionally" low for some time, a subtle commitment to the current policy that could help bring down longer-term interest rates.

In normal times, lower rates reduce the cost of borrowing for households, businesses and financial institutions, which spurs borrowing and economic activity. Those effects are being muted now, however, because many businesses and households are weighed down by heavy debts.

Wall Street rallied sharply Tuesday after the Federal Reserve, in an unexpected move, established a range for its federal fund rate of 0% to 0.25%. The move was more aggressive than the half-point cut, to 0.5%, that analysts had expected.

The Dow Jones Industrial Average surged 359.61 points, or 4.2%, to 8924.14, and the S&P 500 gained 44.61 points, or 5.1%, to 913.18. The Nasdaq climbed 81.55 points, or 5.4%, to 1589.89.