The U.S. Federal Reserve today slashed interest rates to four-year lows in a bid to confront the financial crisis and an almost certain economic slowdown in the United States.

The Federal Open Market Committee voted unanimously to lower the target federal funds rate at which banks lend to each other by 50 basis points to 1%, its lowest since between June 2003 and June 2004.

Today’s action was widely expected by economists.

The Fed also reduced the discount rate charged for direct loans to banks by 50 bps point to 1.25%.

“The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures,” the FOMC said, while the financial crisis “is likely to exert additional restraint on spending.”

“In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability,” the Fed said.

Fed officials will monitor the economy and markets and “act as needed” to promote economic growth and price stability, the Fed said.

Bay Street analysts are suggesting that today’s cut may finally be the bottom for rates.

RBC Economics reports that the Fed pointed to the deterioration in economic growth and the fact that 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,” in explaining the decision. Inflation pressures are also expected to weaken. In fact, policymakers still say that downside risks to the economic outlook persist.

“The worsening of the credit crisis in recent weeks has taken its toll on the Fed’s recently downgraded economic forecast. Prospects for a further decline in consumer spending coupled with slowing industrial activity and a sharp slowdown in the overseas economies, have convinced the FOMC to keep ahead of the inflation curve and maintain negative real rates in the hope of stimulating the ailing U.S. economy,” says National Bank Financial.

Even so, RBC says that the rate cuts likely won’t be enough to prevent the U.S. economy from slipping into recession, “but we believe that it sets the groundwork for the economy to get back on a firming growth path in the second half of next year.”

“A further reduction in risk aversion and funding costs is needed before the impact of the current accommodative level of monetary policy will be able to filter through to the real-side economy,” it says. “Although this is likely to take some time, we expect that the gradual improvement in credit conditions will support a moderate recovery in late 2009. Unless there are indications of a more severe weakening in near-term growth, 1% could represent a floor for the Fed funds rate.”

NBF also says, “we remain hopeful that 1% will be the trough for the target rate in this cycle. Our premise remains that non-traditional tools combined with further fiscal stimulus will be the way to go for the authorities in order to bridge the gap between the time it takes for the banking sector to get recapitalized and the longer period likely needed for monetary policy to have its full impact on the real economy.”

However, TD Economics points out that with “economic activity appearing to have ground to a halt in the second half of the year, and the financial crisis continuing to stifle the effectiveness of the substantial easing in the past year, the Fed appears have signalled its willingness to do more in the future. This is not a certainty given the practical challenges that exist when a central bank rate goes below 1.00%, but it remains a risk worth focusing on.”