The Federal Reserve reduced short-term interest rates on Wednesday for the second time in eight days, meeting widespread expectations by investors on Wall Street for a big rate cut.

Times Topics: Federal Reserve | Ben S. BernankeIn lowering its benchmark Federal funds rate by half a point, to 3 percent, the central bank acknowledged that it is now far more worried about an economic slowdown than rising inflation, and it left open the possibility of additional rate reductions.

“Financial markets remain under considerable stress, and credit has tightened further for some businesses and households,” the central bank said in a statement accompanying its decision. In addition, it said, recent data indicated that the housing market is still getting worse and the job market appears to be “softening.”

Taken together, the back-to-back rate cuts totaling 1.25 percent amounted to the Fed’s most aggressive effort in years to head off a recession. By comparison, the Fed under Alan Greenspan reduced the overnight rate by only a half-point after the terrorist attacks on Sept. 11, 2001.

The news on Wednesday sent stocks higher on Wall Street. Within minutes after the announcement, the Dow Jones industrial average, which had been down slightly in early afternoon, was up 100 points. But it had given up all those gains by the last 15 minutes of the session.

Hours before the Fed announced its decision, the Commerce Department estimated that the nation’s economic growth slowed markedly in the fourth quarter of 2007 to an annual rate of just 0.6 percent from 4.9 percent in the third quarter.

The slowdown was sharper than the already-gloomy forecasts of most economists on Wall Street, where the consensus estimate called for fourth-quarter growth of 1.2 percent.

The Fed’s move on Wednesday came after it electrified investors on Jan. 22 with an even bigger surprise rate cut — three-quarters of a point — at a rare unscheduled meeting.

The Fed cut dovetailed with efforts by Congress and the White House to pass a fiscal stimulus bill that would inject at least another $160 billion into the economy this year in the form of deficit-financed tax rebates for individuals and tax breaks for businesses.

The House passed a measure earlier this week, after reaching agreement with the Bush administration. The Senate Finance Committee began work Wednesday on a bill that would add more money for unemployment benefits, food stamps and potentially other government spending programs.

Though House and Senate lawmakers are expected to haggle over the precise shape of the fiscal package, there is a broad political agreement between Democratic leaders in Congress, President Bush and the Federal Reserve on the need for a stimulus package of some kind.

Taken together, the fiscal package and the Fed’s own rate reductions would amount to a one-two punch aimed at jolting the economy enough to keep it out a recession — or at least mitigate the effects of any downturn that might develop.

Since the Fed reluctantly began reversing course in August, when credit markets abruptly froze in panic as a result of soaring default rates on subprime mortgages, the central bank has slashed the overnight federal funds rate by almost half in a total of five actions thus far.

But policy makers faced difficult questions about how deep to cut rates, and there was widespread uncertainty about whether they would reduce them by a half-percent or by only a quarter-percent.

On Wall Street, where the clamor about a recession remains at a fever pitch, investors had betting heavily on a bigger cut and were poised to send stock prices sharply lower if the Fed moved more cautiously.

Even with the Commerce Department’s preliminary estimate on Wednesday of extremely slow growth in the fourth quarter of last year, the evidence of an impending recession is mixed.

Indeed, many economists estimate that the economy may have added about 100,000 jobs in January — a big improvement from the nearly stagnant pace in December of 18,000 jobs.

Indeed, the ADP monthly survey of job creation, released on Wednesday, estimated that the nation added 140,000 private-sector jobs in January. Though the ADP survey often clashes with the Labor Department’s monthly employment report, which is due out on Friday, the results prompted many economists to raise their estimates of job growth in January.

The Commerce Department reported on Tuesday that orders for all durable goods — big-ticket items like commercial aircraft and auto parts — jumped 5.2 percent last month. Excluding orders for transportation goods, which are volatile from month to month, orders climbed 2.6 percent, the first increase since September.