Federal Reserve policymakers on Tuesday cut short-term interest rates by a quarter-percentage point, the first reduction in nearly three years, in hope of cushioning the U.S. economy from global financial turmoil.

The central bank's monetary policy panel voted to move the benchmark federal funds rate, which banks charge each other on overnight loans, to 5.25 percent from 5.5 percent.The Fed left its discount rate, which it charges on its own loans, unchanged at 5 percent.

The federal funds rate reduction, the first since January 1996, should be reflected within days in most banks' prime rate for their best business customers. As a result, rates on a wide range of consumer and business loans, from credit cards to auto loans to home-equity lines, should move down as well.

One lender, Southwest Bank of St. Louis, led the way Friday by cutting its prime rate from 8.5 percent to 8 percent.

In a statement announcing its action, the Federal Reserve said, "The action was taken to cushion the effects on prospective economic growth in the United States of increasing weakness in foreign economies."

It also said policymakers were concerned about tightening credit conditions in the United States.

Because of changes in the global economy and U.S. credit conditions, the rate cut "should now be consistent with keeping inflation low and sustaining economic growth going forward," the Fed said.

Analysts warned the cut won't entirely insulate Americans from the ongoing global financial crisis. But it could go a long way - if followed by further cuts as expected - to ensuring U.S. consumers keep spending, businesses keep investing and banks keep lending.

"It's sort of like getting a flu shot that doesn't completely work. You still get the flu, but you don't feel as much pain," said economist Bruce Steinberg of Merrill Lynch.

The interest-rate reduction comes a month after the start of a sharp correction in the U.S. stock market, triggered in part by the spread of financial turmoil from Asia to Russia and Brazil.

And it comes less than a week after a dramatic new indicator of instability in the U.S. financial system - the near-collapse of Long-Term Capital Management LP. Its demise was averted when the Federal Reserve Bank of New York arranged a private $3.5 billion bailout by banks and brokerage houses.

The multibillion-dollar hedge fund offered wealthy investors an opportunity to speculate on differences in interest rates among different types of securities.

On Capitol Hill, Congress voted Monday and Tuesday to hold down the college student loan interest rate for all borrowers and raise the maximum grant amount for needy students.

The new formula, based on Treasury bill interest rates and added points, means the rate for students would be 7.46 percent for new loans - the lowest rate in 17 years - down from 8.23 percent last year, sponsors say.