“The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures,” the central bank said. Industrial production and investment in new equipment have also slowed, it said, and slumping growth around the world has reduced demand for American exports.

The government has taken a series of extraordinary steps in recent weeks to get credit flowing again, but while the strains in the credit markets have eased somewhat in response, confidence remains fragile. The central bank left room for itself to drive short-term rates even lower, saying that it would “act as needed” to promote both sustainable growth and stable prices.

But analysts said lower interest rates were not likely to accomplish much at this point, because the economy’s biggest problem is the fear among banks and financial institutions about lending money.

“The difference between 1.5 percent and 1 percent is really pretty insignificant, particularly when the banking system is as weak as it is,” said Ethan Harris, a senior economist at Barclay’s Capital. “You have a big uncertainty shock. It’s not just that the markets have declined. People are uncertain about where the world is going.”

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Indeed, the stock markets reacted chaotically, even though the rate cut was in line with what investors had been expecting. The Dow Jones industrial average plunged nearly 200 points in the first few minutes after the announcement at 2:15 p.m., then zigzagged before closing down 74.16 points at 8,990.96.

The Federal Reserve is within striking range of reducing the overnight lending rate to zero, a point that Japan reached in the 1990s and where it remained for years while struggling to revive its economy.

If the federal funds rate were to reach zero, the Fed would not be out of tools for stimulating the economy. But it would have to resort to unconventional approaches that it has never used before. Instead of trying to reduce rates on overnight loans between banks, for example, it might start buying longer-term Treasury securities.

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If the Fed bought, for example, two-year Treasury notes, that demand would push prices up and yields down, and presumably would also push down the interest rates for consumer credit that tracks those Treasury securities.

The Fed’s biggest weakness at the moment is that the economy’s problems have less to do with interest rates than the reluctance of banks and financial institutions to lend money. Even though the Fed has lent almost $600 billion to financial institutions in the last month alone, banks are still reluctant to lend to businesses or consumers.

Since the credit crisis began in August 2007, the Fed has slashed the overnight lending rate from 5.25 percent. But interest rates for 30-year fixed-rate mortgages are about 6.3 percent, roughly where they were when the credit crisis began.

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Many economists contend that the United States economy has already slipped into a recession that could well last longer and be more severe than any downturn since the early 1970s.

Macroeconomic Advisers, a forecasting firm in St. Louis, said the spate of discouraging economic data over the last four weeks has prompted it to mark down its estimate of third-quarter growth from a slight increase of 0.1 percent to a contraction of 0.7 percent.

“It’s unbelievable what has happened to all aspects of financial conditions in the past several weeks,” said Laurence H. Meyer, a former Fed governor and now vice chairman of Macroeconomic Advisers. “Everything has changed in such a dramatic way.”

Both consumers and businesses have ratcheted back spending. Major corporations from General Electric to Coca-Cola have announced layoffs, and Detroit’s automakers are struggling to survive.

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Private forecasters expect that the Commerce Department, which will release its initial estimate of third-quarter growth on Thursday, will report that the economy contracted about one-half of 1 percent. But most forecasters expect the fourth quarter to be down by 2 percent or more.

The United States has shed more than 700,000 jobs so far this year, and the unemployment rate has climbed to 6.1 percent, from 5 percent in January. What makes that alarming to many analysts is that the job losses usually have come so early in the downturn.

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Traditionally, companies have been cautious about laying off workers at the start of a downturn and equally cautious about adding workers after a recovery begins.

“The ground is moving from underneath us,” said Diane Swonk, chief economist at Mesirow Financial, an investment firm in Chicago.

Details of the administration’s plan to stem foreclosures were still under discussion on Wednesday, but people briefed on the effort said the government might guarantee $500 billion to $600 billion of home loans, or about 5 percent of all loans, for up to five years. The ultimate cost to taxpayers is uncertain and would ultimately depend on the course of the housing market and the economy. The government is expected to allocate up to $50 billion to the program, which assumes only a small portion of the homeowners will default on their loans and losses will be limited.

Officials from the White House, the Treasury Department and the Federal Deposit Insurance Corporation are working on the plan and an announcement could come in the next few days or weeks. Sheila C. Bair, the chairman of the Federal Deposit Insurance Corporation, has been the leading proponent of the plan and first discussed the idea publicly a week ago.

A spokeswoman for the Treasury, Jennifer Zuccarelli, said it would be premature to discuss a plan that policy makers are still working on. “As we said last week, the administration is going through the White House policy process too look at ways to reduce foreclosures, and that process is ongoing,” she said. “We have not decided on a particular approach."

The plan was authorized by Congress earlier this month as part of the $700 billion financial rescue package. Though the government would only allocate about $50 billion to the program, because the money serves as a reserve for losses, it could be used to back loans totaling between $500 billion to $600 billion.

Like with any other insurance company, the government would spend money when something bad happens. In this case, the Treasury or the F.D.I.C. would make a payment to investors or banks if borrowers with loans that have been modified fall behind on their new, lower payments. The government would only cover half of the losses on defaulted loans.

The program is intended to entice servicing companies that handle billing and collections to reduce payments for homeowners by lowering interest rates and writing down loan balances. At the end of June, nearly 1 in 10 mortgages was delinquent or in foreclosure.