Fed cuts rates to the bone.

WASHINGTON (Reuters) - The Federal Reserve on Tuesday aggressively cut its target for overnight interest rates to a record low zero to 0.25 percent, and said it would employ "all available tools" to dispel a year-long recession.

The surprise move to lower its target for the benchmark federal funds rate by 0.75 percentage points to up to a full point from its prior 1 percent put the Fed in unprecedented policy territory. Financial markets had expected the Fed to lower rates by no more than three-quarters of a point.

"The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability," the Fed said.

The cut in the federal funds rate pushes it to its lowest level on records dating to July 1954, and the central bank said it would likely keep it at "exceptionally low levels for some time."

In addition to the rate cut, the Fed said it was prepared to expand already announced large purchases of debt issued by government-sponsored mortgage agencies to support the battered

U.S. housing market. It also said it was mulling possible purchases of longer-term government debt and would consider other ways to tap its balance sheet to support the economy.

Prices for U.S. stocks and government debt shot higher, while the dollar slipped, on the Fed's announcement.

"It's a highly unorthodox and creative step," said Michael Woolfolk, senior currency strategist, at the Bank of New York-Mellon in New York. "We think it's the best possible move for the U.S. consumer and for the financial market."