aced with an economic deterioration that has accelerated since the terrorist attacks last month, the Federal Reserve once again cut interest rates today by an expected half a percentage point, to their lowest level since 1962.

Today's rate cut was the ninth this year by the Fed. Perhaps more important, it was the second half-point cut since the attacks against the World Trade Center and the Pentagon on Sept. 11.

The Fed lowered its target for the federal funds rate on overnight loans among banks to 2.5 percent, from 3 percent.

"The terrorist attacks have significantly heightened uncertainty in an economy that was already weak," the Fed said in a statement. "Business and household spending as a consequence are being further damped.

"Nonetheless, the long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate," the central bank added.

It said its policy-making Federal Open Market Committee "continues to believe that, against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future."

The Fed also cut its discount rate on loans to banks from the Federal Reserve System to 2 percent, from 2.5 percent.

In response to the Fed's rate cuts, a number of banking companies — including Bank of America, J.P. Morgan Chase, Bank One, Fleet Boston Financial and Wells Fargo — reduced their prime lending rates for their most credit-worthy customers to 5.5 percent, from 6 percent.

Stock prices, which were slightly higher ahead of the Fed's announcement, initially retreated this afternoon after the rate cut. But stocks later reversed directions and closed with moderate gains. Prices of Treasury securities maintained most of their earlier gains.

Many Wall Street economists said the Fed's actions seemed appropriate as part of a campaign to build confidence in the financial markets and among consumers.

The Fed is "trying to restore confidence," said Kathleen Stephansen, director of economic research for Credit Suisse First Boston. While the last rate cut was accompanied by a statement suggesting that the terrorist attacks could worsen the economy, she said, "we have here an acknowledgment that things are very fragile."

When it has moved aggressively over periods of time in the past, the Fed has set itself up for backtracking. But economists expressed little worry that today's action would lead to significantly higher inflation or otherwise cause the Fed to raise rates again.

To the contrary, "I think the question is whether they're done or not," said Jade Zelnik, chief economist at Greenwich Capital Markets. And even if the Fed lowers rates again soon, crossing through a doorway it clearly left open today, she said, "the economic weakness is global. Pricing power will remain weak even as the economy rebounds."

While the move seems intended mostly to inspire confidence, it may also pull some of the economic levers that monetary policy is usually intended to pull, said Peter Hooper, chief economist at Deutsche Banc Alex. Brown. Since the attacks, longer-term interest rates have finally been falling, a result the Fed had little success producing with its cuts to short-term rates.

In long-term rates, "I would expect to see some decline," Mr. Hooper said. But the rate cut more clearly "helps in the near-term, at least by helping to calm an unusual situation of uncertainty and, if you will, fear," he said.

The last cut in interest rates, on Sept. 17, was announced before the stock market reopened that day after being shut for four trading days by the terrorist attacks. That decrease was accompanied by a release from Mr. Greenspan and his colleagues vowing to pump money into the financial system "until more normal market functioning is restored."

The rate cut on Sept. 17, and the promise of more to come if necessary, did not prevent the market from tumbling. The post-attack slide was so precipitous that the quarter just ended was the market's worst since the stock market crash in 1987. The week of Sept. 17 through Sept. 21 was the worst for the Dow Jones industrial average since the Great Depression.

The market recovered last week, going up 7.4 percent for its best weekly showing since 1984. But even that erased less than half the losses stemming from the catastrophe of Sept. 11.

Uncertainty has surrounded the stock market since early this year, and the mood darkened greatly after Sept. 11. Airlines were sent reeling (although they have recovered somewhat with the prospect of government help), and their troubles have sent ripples of gloom through the travel industry and beyond.

By several gauges, consumer confidence has dwindled since the terrorist attacks, meaning that more people are putting off big purchases and big plans.

Long before Sept. 11, the economy had been slowing, and the Fed's string of rate cuts had done relatively little to turn things around. Now, with the prospect of a long, complicated and costly campaign against terrorism, budget surpluses may evaporate. It remains to be seen whether the Fed's aggressive rate-cutting can keep the people's optimism from evaporating with them.

Earlier today President Bush said he was working with Congress to devise an economic stimulus package that would be big enough to revive economic growth but not so large that it leads to inflationary pressures that would push up long-term interest rates.

The package may include another tax cut, increased unemployment benefits and corporate investment tax credits. Mr. Bush declined, however, to give details about the package being discussed, but lawmakers have mentioned a program of up to $100 billion, including the $40 billion in emergency spending that has already been approved.

After a breakfast meeting with Vice President Dick Cheney and Congressional leaders, Mr. Bush declined to say whether the nation was already in recession. But his chief economic adviser, R. Glenn Hubbard, told the Senate Budget Committee that the United States was likely to have two consecutive quarters of economic decline — the definition of a recession.

In moving quickly and aggressively to cut interest rates, Mr. Greenspan is sticking to the playbook that has worked effectively through his 14-year tenure as central bank chief: deal with crises through rapid, forceful action to stabilize the financial system and the economy, and worry about longer-term consequences later.

But as he surveys the economic and political landscape, Mr. Greenspan confronts some tricky issues. One is the possibility that the Fed will cut rates too much, sending the economy into overdrive next year and forcing it to backtrack by raising rates.

In addition, the latest rate cut could limit the Fed's ability to act in the future if further reductions appear to be needed. The federal funds rate is now at its lowest point since May 1962.

The Fed has brought its benchmark federal funds target down to 2.5 percent from 6.5 percent this year, one of the most intensive periods of monetary policy easing on record. The economy has probably yet to feel the full kick from the early rate cuts, which have a lag period.

Although this year's rate cuts do not seem to have packed as much of a punch as in the past, the Fed has often had to take back some of its cuts when the immediate crisis passed. When it rapidly lowered rates late in 1998 in response to the global financial crisis that began in Asia, it helped fuel what became an unsustainable economic and investment boom that led it to raise rates through much of 1999 and into 2000.

In 1998, of course, the economy was strong to start with, despite the turmoil in the financial markets; today, it is weak and almost certainly getting weaker.