This had better work.

The Federal Reserve and central banks around the world have slashed interest rates in a last-ditch bid to shore up a teetering financial system. Markets had a cool response, however. Stocks at first steadied after the coordinated rate move. But later in the day, stocks in the United States swung wildly, falling sharply in the final minutes of trading to close down 2 percent. Credit markets remained locked up.

The late sell-off in stocks came as Treasury Secretary Henry Paulson gave a gloomy outlook on the weeks ahead as governments work to combat the global credit crisis.

"One thing we must recognize—even with the new Treasury authorities—some financial institutions will fail," he said at a news conference.

Earlier in the day, the Fed unanimously agreed to cut its benchmark rate by a half point, to 1.5 percent.

The central bank said it "took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures."

"Incoming economic data suggest that the pace of economic activity has slowed markedly in recent months. Moreover, the intensification of financial-market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit."

The European Central Bank, the Bank of England, the Bank of Canada, and the Riksbank of Sweden all cut their rates by a half point as well. The Bank of Japan said it supported the effort but did not cut rates. And  both the central banks of Switzerland and China cut rates.

It was the first worldwide coordinated rate cut since the aftermath of the September 11 attacks.

But lending rates among banks remain high. "It does not do anything to change the price of money, it is the availability of money" that is the problem, one trader told the Financial Times' Alphaville blog.

For the Fed, the half-point cut may be as low as it dares to go, says Yves Smith on Naked Capitalism: "The Fed is probably unwilling to cut beyond that for fear of winding up in Japan-style zero-interest-rate territory."

Still, the rate cuts came on a day when it appeared that the global bloodbath in the stock markets would only grow, with Tokyo closing down 9.4 percent.

And the Lex column on the Financial Times’ website argues that the rate cuts will make a difference:

"What they will do is generate a positively sloped yield curve on government bonds. Crucially, this will help banks recapitalize themselves as they borrow at the short end, lend to governments at longer maturities, and pocket the spread."

The coordinated action also came on a day when Britain announced that it would buy some $88 billion of preferred shares in eight banks and building societies (the U.K. equivalent of savings and loans).

"We have led the world today with a proposal to restructure our banking system," Prime Minister Gordon Brown said. "We are taking the steps that I believe that other countries will take in the future."