March 19, Bloomberg

The Federal Reserve cut its main lending rate by three-quarters of a percentage point to 2.25 percent as officials try to prop up the faltering economy and restore faith in the U.S. financial system.

Chairman Ben S. Bernanke is struggling to cushion consumers and companies from the worst of the credit freeze that's made some of the world's biggest banks reluctant to lend to each other. Officials also showed renewed concern about inflation, making a smaller reduction than traders anticipated. Two policy makers dissented in favor of ``less aggressive action.''

``Recent information indicates that the outlook for economic activity has weakened further,'' the Federal Open Market Committee said in a statement today after meeting in Washington. At the same time, ``inflation has been elevated, and some indicators of inflation expectations have risen.''

Stocks extended their rally, pushing the Standard and Poor's 500 Index 4.2 percent higher to 1,330.74. The dollar rose the most in almost four years against the yen.

``The Fed made a very clear statement: We are on the side of the economy and the markets, and if we have to do more, we will,'' said Steven Einhorn, a partner at hedge fund Omega Advisors Inc. in New York.

The Fed Board of Governors also voted to lower the discount rate, the cost of direct loans from the central bank, to 2.5 percent.

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photo: Stephen Guilfoyle works on the floor of the New York Stock Exchange in New York, on March 18, 2008. Photographer: Daniel Acker/Bloomberg News