The US Federal Reserve has cut a key interest rate by a half-percentage point this evening to prevent a widening credit crisis from tipping the United States into a deep and prolonged recession.
The Fed's decision takes its target for overnight bank lending to 1 per cent, the lowest since June 2004.
The benchmark overnight rate has been cut from 5.25 per cent in nine steps over the past 13 months to counter a financial storm that started with the collapse of the US mortgage market and spread around the world.
"Downside risks to growth remain," the Federal Open Market Committee said this evening in a statement.
"Recent policy actions, including today's rate reduction, co-ordinated interest-rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems should help over time to improve credit conditions and promote a return to moderate economic growth," it continued.
Fears of an acute recession have pushed US stock prices down sharply this month, although equities enjoyed a large rally on Monday. The blue chip Dow Jones industrial average was up before the Fed's decision, but turned lower after the central bank's announcement.
The dollar trimmed loses against the euro and prices for US government debt pared gains.
The Fed has acted aggressively to combat the credit crisis with a series of measures aimed at pumping liquid funds into markets that had become largely frozen and risk averse, and policy-makers highlighted those steps in their statement.
Nonetheless, they concluded that "downside risks to growth remain," keeping open the option of further rate cuts.
While the Fed's steps to counter the credit crisis have begun to bear some fruit, US businesses and consumers looking ahead see an increasingly gloomy economic outlook.
"The economy (is) likely to be weak for several quarters, and with some risk of a protracted slowdown," Fed Chairman Ben Bernanke told Congress on October 20th as he endorsed additional spending by the government to boost the economy.
Economists polled by Reuters expect a report on GDP tomorrow to show the economy contracted at an annualised 0.5 percent rate in the third quarter.
The US labour market has shed jobs for nine consecutive months, pushing the jobless rate to 6.1 per cent in September, while industrial production has tumbled. Consumer confidence plunged to a record low this month.
A key component of US economic malaise is a depressed housing market. Demand for new homes is low and a sizable backlog of unsold homes clutters the market, suggesting residential construction will continue to contract into 2009.
The decelerating US economy has led to a sharp retrenchment in energy prices, pointing to lower inflation. Crude oil has fallen by more than half since a record peak at $147 a barrel in July.
Additional reporting Reuters