Yesterday's action, which slashed the rate to zero to 0.25 percent, should be the last as the central bank might have no room for further cut, according to analysts. That is down from the 1 percent target rate in effect since the last meeting in October.

Economists had expected a smaller cut of just 0.5 percentage point.

"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability," said the US central bank in a statement.

"In particular, the committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time," it added.

The Tuesday's cut followed two times of a half-point cut in October coordinated with other six major central banks to help cope with the current financial crisis.

The Fed has never pushed its target for the federal funds rate as low as zero to 0.25 percent. The lowest target rate before had been 1 percent, a level seen only once before in the past half-century.

In a related action, the cental bank also unanimously approved a 75-basis-point decrease in the discount rate to 0.5 percent.

In a statement, the Fed said since the last meeting in October," labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined."

"Financial markets remain quite strained and credit conditions tight," warned the central bank. "Overall, the outlook for economic activity has weakened further."

According to November consumer price data released on Tuesday, annual US inflation is now running just 1.1 percent, matching its lowest rate since 1965. If December data come in soft as expected, the annual rate could approach zero.

"Inflationary pressures have diminished appreciably," said the Fed in the statement.

"In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the committee expects inflation to moderate further in coming quarters," it noted.

Economists worried the Federal Reserve might have run out of ammunition to fight the worst financial crisis since the Great Depression in 1930s.

Even US President-elect Barack Obama warned on Tuesday that "we are running out of the traditional ammunition that's used in recession, which is to lower interest rates, they're getting to be about as low as they can go."

However, Federal Reserve Chairman Ben Bernanke said the Fed will use unconventional methods to tackle the current financial crisis.

The focus of the Fed's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level, said the central bank in the statement.

The Fed also vowed it will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant.

"The committee is also evaluating the potential benefits of purchasing longer-term Treasury securities," said the Fed, noting it "will continue to consider ways of using its balance sheet to further support credit markets and economic activity."

The Fed's balance sheet has soared to US$2.2 trillion, up from nearly US$900 billion in September, reflecting efforts to mend the financial system.

The US economy has been in a recession since December 2007, as was announced by the National Bureau of Economic Research (NBER), the semi-official arbiter of recession, on December 1.

Economists polled by Reuters last week expected the economy to contract at an annualized 4.3 percent in the last three months of the year, and to continue to shrink through the first six months of 2009.

The US stocks surged yesterday as investors welcomed the Federal Reserve's bold decision. The Dow Jones Industrial Average leapt 362.32 points, or 4.23 percent to 8,926.85 at the closing bell.

"The message is simply the Fed stands ready to do everything in its power to stop the economy's free fall," said Richard Yamarone, economist at Argus Research.