Fed Cuts Interest Rate to ’64 Level : Economy: Amount charged to commercial banks is slashed to 3.5%, half of pre-recession cost. Experts say the full percentage-point drop could help spur a recovery.

In its most dramatic move since the recession began 18 months ago, the Federal Reserve Board on Friday slashed its benchmark discount rate by a full percentage point--to 3.5%--bringing it to its lowest level since 1964.

The action marked the fifth time in the past year that the Fed has cut the discount rate, the rate it charges commercial banks for loans. But it was the largest one-time rate reduction in more than a decade and it brought the rate to just half of the 7% level that prevailed when the recession began in July, 1990.

The central bank also slashed the federal funds rate, the rate member banks charge each other for overnight loans, from 4.5% to 4%. Leading banks cut the prime rate that they charge their best corporate customers by a full percentage point to 6.5%, the sixth decline this year and the lowest level since 1977. Other consumer and mortgage interest rates are expected to fall also as the Fed’s actions ripple through the economy over the coming weeks.

Economists praised the Fed and said the big cut may be the medicine needed to get the economy moving again. Although they do not expect a recovery to gather steam until the middle of next year, many stressed that Friday’s action should at least break the economy’s fall.

The lower rates are intended to ease the nation’s credit crunch, encouraging banks to be less cautious and lend more money to consumers and businesses. The rates should make houses and cars more affordable and make consumers more willing to spend and borrow.

Economists and Administration officials hope that looser credit will stimulate an increase in investment in a wide array of industries, including construction and manufacturing, creating new jobs.

“It was high time for someone in Washington to send a message that we are doing something to pull the economy out of this slump,” said Roger Brinner, an economist with DRI-McGraw Hill, a Lexington, Mass., forecasting firm.

The Fed’s action came on the heels of a string of recent bleak economic reports that made it apparent that the economy has plunged back into recession. The economy has been losing roughly 2,600 jobs per day over the past three months.

The Fed has cut interest rates repeatedly throughout the recession but until Friday had not acted so decisively. Almost all of its previous rate reductions had come in small increments of 1/4%, reflecting the Fed’s cautious strategy of slowly easing credit while still keeping a tight grip on inflation. And, until the last few weeks, most senior Fed officials believed they had done enough to spur the economy, and that interest rates did not need to go any lower.

But the worsening economic news--and growing signs that inflation is no longer a threat--convinced the Fed to change course, and to do so in a way that would get the public’s attention.

“They made a really big statement Friday,” said Marco Babic, an economist at Evans Economics, a Washington research firm. “They pulled out all of the stops.”

Senior Fed officials acknowledged that their move was designed to be so resounding as to provide a psychological boost to the country, and to lift the gloom that has descended over the economy.

“There was a consensus that we had followed a gradual policy when that was appropriate, but that now it seemed to make sense to do this all at once,” said one senior Fed official.

The decision to cut the discount rate, made at a Thursday night meeting of the Fed’s seven-member Board of Governors, reflected the growing fears of Fed Chairman Alan Greenspan that plunging consumer confidence was a serious threat to the ability of the economy to recover. In congressional testimony earlier this week, Greenspan warned that the mood of the nation seemed to be lower than at any point in his lifetime.

Only one Fed board member, Wayne Angell, dissented from the rate cut.

The White House and Congress quickly applauded the action. President Bush, who for months has pressed for lower interest rates, hailed it as a “significant step” and said it would “help our efforts to turn the economy around and get America back to work.”

Commerce Secretary Robert A. Mosbacher, who will soon take over as chairman of Bush’s reelection campaign, said the move will be helpful in making “the economy jump up and go.”

Leading Democrats, including House Budget Committee Chairman Leon E. Panetta (D-Carmel Valley) called the Fed’s action “long overdue.” Senate Banking Committee Chairman Donald W. Riegle Jr. (D-Mich.) added: “The action by the Fed--late as it is--I think reflects the Fed’s anxiety, their apprehension about the weakness of our economic system and our financial structure.”

Despite the rate reductions, the Bush Administration still faces criticism for its failure to move more quickly to use tax and budget policy to jump-start the economy. Economists and leading Democrats said the Fed’s action takes pressure for stimulating the economy off Greenspan, and puts more on Bush to come up with a growth package next month that he can quickly push through Congress. Bush is expected to unveil his growth package in his State of the Union speech Jan. 28.

“The ball is now in President Bush’s court,” said Lawrence Hunter, chief economist for the U.S. Chamber of Commerce. The Fed action, Hunter said, “takes away the last excuse the President has for not proposing equally bold measures to improve long-term economic growth.”

Confronted with such pressures, White House aides were rushing on Friday to assemble at least the elements of an economic package before Bush departs Dec. 30 for a 12-day trip to Asia. Administration officials stressed the review process has been intensive. On Friday alone, they said, Bush spent more than two hours in Oval Office meetings to consider proposals for next year’s federal budget and review steps taken to ease the credit crunch.

As part of an effort to portray the President as deeply engaged in domestic issues, new Chief of Staff Samuel K. Skinner appeared unannounced Friday in the White House briefing room to stress repeatedly that Bush was “working very hard.”

Skinner, who has ordered senior White House staffers to work a six-day week, said that “very tough times” demanded the full attention of the President’s aides. “This is a critical time for the country and the economy,” he said.

Officials emphasized that no final decisions have been made, but indicated the package may include a temporary tax credit for new business investments, a reduction in the capital gains rate and an expansion of the benefits of individual retirement accounts to allow first-time home buyers to make penalty-free withdrawals from IRAs.

But tax relief for the middle class is the most controversial issue now being debated within the White House. A one-time tax break for the middle class is still under discussion, although a $300 “tax rebate” plan came under heavy criticism earlier this week.

Times staff writer Douglas Jehl contributed to this story.