The Federal Reserve unexpectedly slashed a key interest rate by a bold three-fourths of a percentage point on Tuesday, responding to a global plunge in stock markets that heightened concerns about a recession. The Fed signaled that further rate cuts were likely.

The reduction in the federal funds rate from 4.25 percent down to 3.5 percent marked the biggest reduction in this target rate for overnight loans on records going back to 1990. It marked the first time that the Fed has changed the funds rate between meetings since 2001, when the central bank was battling the combined impacts of a recession and the terrorist attacks.

Federal Reserve Chairman Ben Bernanke and his colleagues approved the large rate cut after an emergency video conference on Monday night, a day when global markets had been pounded by rising concerns that weakness in the world’s largest economy was spreading worldwide.

After the news, U.S. Bancorp (NYSE: USB, TCF Financial Corp. (NYSE: TCB) and Wells Fargo & Co. (NYSE: WFC) were among the banks lowering their own prime lending rates.

“I spent six years on the Federal Reserve board in San Francisco, and I gotta tell you, three quarters of a point cut is a stunning change,” said Rick Hartnack, vice chairman of head of consumer banking at U.S. Bancorp. “What it will do is really make mortgages a lot more affordable – and that is absolutely critical to fixing the imbalance of supply and demand for housing right now.”

But Hartnack warned that “if it sounds too good to be true, it probably is. Government stimulation is always too much too late, and usually leads to inflation,” he told the crowd at the Hiltion.

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