Fed lowers interest rates to 1.25 percent.(Chicago Tribune)

WASHINGTON _ Citing a weak economy and the threat of war, the Federal Reserve flexed its monetary muscle Wednesday and cut interest rates by one-half of 1 percent _ twice what many observers had expected.

The size of its first interest-rate reduction this year reflected the Fed's concern over the economy's sluggish performance. Chairman Alan Greenspan's central bank is taking no chances that a devastating period of deflation, or falling prices, could take hold in the United States, as it has in Japan.

The Fed voted unanimously to lower its benchmark overnight bank lending rate to 1.25 percent. It hopes to spur more consumer spending and business investment. Investment spending is a key to job creation and economic growth, but it has been stagnant for two years.

Several analysts said the bold move would help the economy recover by cutting borrowing costs, especially for businesses that have complained that banks are charging too much. But …