The Federal Reserve tonight cut US interest rates a quarter percentage point to a 45-year low and suggested it stood ready to take more action if the risk of falling prices worsened.
The central bank's rate-setting Federal Open Market Committee (FOMC) trimmed the bellwether federal funds rate for overnight loans between banks to 1 per cent, the 13th rate reduction since early 2001 in a campaign aimed at nursing the economy through a recession and back to vigorous health.
All but one member of the committee voted for the cut with San Francisco Federal Reserve President Mr Robert Parry pushing for a more aggressive half-point reduction.
"Recent signs point to a firming in spending, markedly improved financial conditions and labor and product markets that are stabilizing," the FOMC said in its post-meeting statement.
"The economy, nonetheless, has yet to exhibit sustainable growth. With inflationary expectations subdued, the committee judged that a slightly more expansive monetary policy would add further support for an economy which it expects to improve over time," it added.
Markets gyrated following the decision with blue-chip stocks falling and Treasury bonds turning lower but the dollar rising. Many in financial markets had been hoping for a larger reduction.
As in its statement following its meeting on May 6th, the Fed was sanguine about prospects for future growth even as it voiced concern about the risk of deflation or falling prices.
"On balance, the committee believes that the latter concern is likely to predominate for the foreseeable future."
Recent data have shown the economy is still crawling back from a relatively mild recession in 2001, a sluggish pace that has pushed the unemployment rate to above 6 per cent from under 4 per cent late in 2000.
Gross domestic product has expanded at around a 2 per cent annual rate, well under the 3-to-3.5 per cent pace seen as the US economy's long-term potential for growth.