The Federal Reserve has cut its discount rate half a percentage point to 5.75 per cent this morning and said the downside risks to future economic growth have "increased appreciably".
The Fed said it was acting "to promote the restoration of orderly conditions in financial markets".
"Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward," the statement said.
The 0.5 per cent point reduction narrows the spread between the Fed's target 5.25 per cent overnight money market rate and the rate it makes on its own direct loans to banks.
That will have the effect of "smoothing the funding of riskier paper", said Duncan Balsbaugh at Thomson IFR Markets. "The collateral that can be used at the window can be of a much lower rating than the normal operations."
Riskier paper is the mortgage-backed debt that has suddenly become toxic in financial markets.
Also to smooth out banks' financing, the Fed statement said it is extending the terms of discount window loans.
The changes are designed to provide banks with "greater assurance about the cost and availability of funding", so easing fears about liquidity.
The Fed said it is monitoring the situation and is prepared "to act as needed" to reduce the effects of financial market disruptions on the economy.