The U.S. Federal Reserve on Wednesday cut interest rates for the second time in as many weeks as it sought to prop up the U.S. economy.

The central bank cut the federal funds rates by 0.5 of a percentage point, a move expected by many economists. The federal funds rate now stands at three per cent.

On Jan. 22, the Fed made a surprise rate cut of 0.75 of a percentage point in a rare move between scheduled decision dates.

"Financial markets remain under considerable stress, and credit has tightened further for some businesses and households," the Fed said Wednesday in a statement. "Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labour markets."

The Fed said the cut in interest rates should help promote growth, but it cautioned that risks to the health of the U.S. economy remain.

Loonie climbs

The expanded spread between Canadian and U.S. interest rates gave some added loft to the loonie on Wednesday. The Canadian dollar gained more than a cent before easing toward the end of the day. The loonie ended up 0.63 of a cent at $1.0068 US on foreign exchange markets.

The weak state of the U.S. economy was underlined earlier in the day, when the U.S. Commerce Department said fourth-quarter growth was an annualized rate of just 0.6 per cent. That pace was just half of what economists had been predicting.

The October-December period was also a marked downturn from the 4.9 per cent annualized growth seen in the third quarter.

For all of 2007, the U.S. economy expanded by 2.2 per cent, which was its weakest performance since 2002, when the country was getting over a 2001 recession.