In announcing Tuesday's rate cut, the Fed noted that consumer spending has held up reasonably well during the slowdown. But it warned that business profits and capital spending continue to weaken and economic growth is slowing overseas. Although the U.S. economy's long-term prospects remain favorable, it said, "the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future."

The Fed action should prompt similar reductions in rates charged on auto loans, home equity loans and credit lines, variable-rate credit cards and business loans pegged to the benchmark prime rate. The impact on new fixed-rate mortgages is expected to be negligible because they are influenced mainly by long-term bond rates. Savers will be penalized somewhat as the Fed cut is mirrored in rates paid on savings accounts and certificates of deposit.

In the 1990-91 recession, the Fed reduced the real, or inflation- adjusted rate on overnight loans all the way to zero to trigger a recovery. After Tuesday's reduction, the real federal funds rate will be about 0.8%. Economists said that leaves room for additional rate cuts if the economy fails to perk up in coming weeks.