The Federal Reserve cut US interest rates by a quarter-point last night, to only 2 per cent, the lowest since December 2004, as it pursued its drive to limit America’s economic downturn.

The move was the seventh consecutive reduction in a series in which the Fed has lowered rates by 3.25 percentage points since September as it strives to bolster faltering growth in the United States. The Fed also lowered its discount rate for emergency lending to US banks by another quarter-point to 2.25 per cent.

The modest scale of last night’s reduction and speculation that it could be followed by a temporary pause in the Fed’s rate-cutting campaign combined to unnerve Wall Street. The Dow Jones industrial average, which had earlier gained more than 100 points, topping 13,000 for the first time since January, lost ground after the Fed’s verdict and closed down 11.80 points at 12,820.10.

The Fed failed to fulfil predictions that it would give a clear signal of a temporary halt to further rate cuts. While it did drop its past view that “downside risks to growth remain”, it kept markets guessing over its next move. Striking a balanced tone, it pledged to “act as needed” to both promote growth and curb inflation.

Oil is the key to world recovery

The shock of $140 oil has created inflationary and deflationary pressures that threaten world economy and policy tools

• Former President Bush energy adviser says oil is running out

Background

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The Fed’s action came after official confirmation that the US economy almost ground to a halt in the first quarter. Growth just matched the previous three months to register a quarterly gain of only 0.15 per cent. This was equal to an annual rise of 0.6 per cent on the basis favoured by Wall Street.

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