The Federal Reserve has cut its benchmark interest rate by three-quarters of a point, to 3.5 percent.

The surprise move came a week before Fed policymakers were expected to approve a half-point cut at their regularly scheduled meeting. It is the first rate cut to take place between meetings of Fed policymakers since September 2001, when the central bank acted in the aftermath of the terrorist attacks.

The Fed said it made the decision "in view of a weakening of the economic outlook and increasing downside risks to growth."

"While strains in short-term-funding markets have eased somewhat, broader financial-market conditions have continued to deteriorate and credit has tightened further for some businesses and households," the Fed said. "Moreover, incoming information indicates a deepening of the housing contraction, as well as some softening in labor markets."

The rate cut follows a wave of selling on world stock markets on fears that a recession in the United States would drag down the global economy. At the same time, the effects of the implosion in the subprime mortgage market continued to be felt, as banks take additional write-downs and a major bond insurer has had its triple-A rating stripped as a result.

In a speech in Washington on January 10, Fed chairman Ben Bernanke signaled that aggressive steps might need to be taken.

"In light of recent changes in the outlook for, and the risks to, growth, additional policy easing may well be necessary," Bernanke said. "We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks."

Still, the rate action was sooner and bigger than investors had been expecting, but the cut has so far only slightly moderated a big slide in stocks.

For many, the rate cut simply came too late.

"What this move shows is that the Fed is reacting, not leading," says the New York Times' Floyd Norris on his blog. "Last week, it could have impressed investors with a 50-basis-point cut."

Barry Ritholtz on the Big Picture blog says: "The Fed slashes rates 75 basis points—and another 75 basis points are implied for next week's meeting. There is a none-too-faint whiff of panic about today's actions."

Fed policymakers voted 8 to 1 for the rate reduction, with William Poole, president of the St. Louis Federal Reserve Bank, dissenting. The Fed also lowered the discount rate by three-quarters of a point, to 4 percent.

The reaction in the stock markets, says economist Nouriel Roubini, shows that "investors are waking up from the delusion that the U.S. would avoid a hard landing and that the rest of the world could decouple from such hard landing."

"Even aggressive Fed easing will not prevent this severe recession."