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Fed Slashes Key Funds Rate to Ease Lending

The Federal Reserve lowered a key interest rate on Tuesday by three-quarters of a percentage point, a hefty cut that nonetheless was smaller than many analysts had expected.

The federal funds rate now stands at 2.25 percent, the lowest since February 2005. Today's cut comes amid turbulent market conditions sparked by wide sub-prime mortgage losses. Those setbacks prompted an emergency rescue of heavily exposed investment bank Bear Stearns earlier this week.

Many experts in the financial markets had expected the Fed to cut the overnight lending rate by a full percentage point.

The Fed's action is designed to infuse liquidity into the markets in hopes of staving off a freeze in financial markets that could send the economy into freefall. It makes it easier for consumers and businesses to borrow money.

Analyst Greg McBride of Bankrate.com said that while the rate cut won't affect fixed mortgages, it will help homeowners with adjustable home loans.

"The single biggest beneficiaries of the Fed's repeated interest rate cuts are homeowners that have adjustable rate mortgages due to reset in 2008," McBride said.

McBride said that those homeowners could actually see a reduction in their monthly house payments.

For now, the central bank has determined that stimulating the economy is more important than controlling inflation. Speaking on NBC's Today show, Treasury Secretary Henry Paulson earlier Tuesday acknowledged that the economy "has turned down sharply."

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