The Federal Open Market Committee cut interest rates by a half percentage point Wednesday, clearly hoping to shore up investor confidence and prod a sagging economy.

The move was widely expected on Wall Street.

“It’s important for the market’s psychology that the Fed do something,” Michael James, a managing director at Wedbush Morgan Securities said prior to the decision.

James had predicted a rate cut of anywhere from a half to a full percentage point. “Cutting 25 basis points (a quarter percentage point) is not enough,” he had warned.

Stock markets have fallen 40% from their highs of a year ago and no amount of federal intervention has helped stop the bleeding.

In that environment it was hardly surprising the Fed lowered interest rates for the second time this month.

“This country’s economy is still mired in a recession and the risks to inflation are nonexistent. The Fed will cut as necessary,” predicted John Lonski, chief economist at Moody’s Investor Service.

The unanimous vote by Fed Chairman Ben Bernanke and his colleagues cut the federal funds rate -- the overnight rate at which banks loan to one another -- to its lowest level in four years. The rate now stands at 1%.

Despite an 889-point surge by the stock market on Tuesday, gloomy economic news continues to darken the financial landscape and point toward a recession.

The Fed noted as much in a statement that accompanied the half-point cut: "The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. 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 Fed statement also said inflation fears have waned as commodity prices -- notably oil -- have come down in recent months.

Lots of recent news points toward a recession.

A widely watched index showed that consumer confidence has fallen to its lowest level on record. The Conference Board reported on Tuesday that its index dropped to 38 in October, from 61.4 in September. Shaken consumer confidence will very likely translate into slower sales at U.S. retail stores, a bad omen for the upcoming holiday shopping season.

Equally troubling was news that U.S. home values continue to decline by record amounts.

The Standard & Poor's/Case-Shiller 20-city housing index released Tuesday showed a drop of 16.6% in August from the year ago, the largest on record going back to 2000. The smaller, 10-city index, fell 17.7%, the biggest decline in its 21-year history.

Employment news is hardly more encouraging. The unemployment rate -- now at 6.1 % -- is expected to hit 7.5% or higher by next year. Whirlpool Corp., the nation's largest home appliance maker, said Tuesday it will cut about 5,000 jobs by the end of 2009.

Furthermore, the economy is believed to have contracted in the third quarter by around 0.5%. If that estimate is correct, it would mark the biggest decline in economic activity since the third quarter of 2001, when the country was suffering through its last recession.

Most of the economic swoon can be tied to the bursting of the U.S. housing bubble last year. That set off a chain reaction that has led to millions of mortgage defaults and home foreclosures, the tainting of hundreds of billions of dollars worth of bank securities tied to mortgages, turmoil on Wall Street, a credit crunch of historic proportions and a likely global recession.

The turmoil has led to government intervention into the U.S. financial system at a level not seen since the Great Depression.

Still, these interventions, which have included the rescues of mortgage giants Fannie Mae, Freddie Mac and insurance giant American International Group, a controversial $700 billion proposal to buy toxic assets from wobbly banks, and a plan to inject capital directly into nine of the biggest U.S. lenders, have done little to prop up investor confidence.

Lower interest rates make it cheaper for people to borrow money, a condition designed to serve as a catalyst for a sluggish economy since lower rates tend to prod people and businesses into increasing their spending.

In June, the Fed stepped away from a protracted strategy of rate cuts that began last September when the financial crisis began taking shape. Instead, the Fed held rates steady and began eyeing inflation warnings.

But doing nothing proved unsuccessful as financial conditions deteriorated badly throughout the summer and into September, when investment bank Lehman Brothers collapsed into bankruptcy sending shock waves throughout global markets.

Earlier this month, in a sign of heightened sense of global urgency, the Fed and other central banks joined together to slash rates, the first coordinated move of that kind in the Fed's history.

As expected, the Fed left the door open to additional action at its last scheduled meeting of the year on Dec. 16.

“The real test will be once things start to improve in the credit or financial markets, and this may not come for a year – or even if they become less abnormal. The Fed is going to have to raise rates forcibly and quickly,” said Stuart Hoffman, chief economist at PNC Financial Services.