US Federal Reserve grants modest rate cut

The US Federal Reserve cut interest rates last night by a quarter percentage point to 4.25% or 25 basis points.

The cut in the federal funds rate is the third in the past three months by the world`s most powerful central bank. Fed officials signalled that further cuts were possible if the downturn in housing and the crisis in mortgage lending were to get worse.

The change ``should help promote moderate growth over time,`` the Federal Open Market Committee (FOMC) said in a statement after meeting on Tuesday in Washington.

According to the press release issued by US Federal Reserve, readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation. In this context, the Federal Open Market Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.

Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth

In addition to cutting the funds rate, chairman Ben Bernanke announced that the Fed was reducing its discount rate, the interest it charges to make direct loans to banks, also by a quarter-point, to 4.75%. This reduction was aimed at encouraging banks to borrow more freely from the Fed at a time when there are worries that a rising number of bad loans will prompt banks to tighten credit conditions too severely, adding another strain on the already fragile economy.

Commercial banks were expected to match the latest reduction by trimming their prime lending rate - which would reduce the rate for millions of consumer and business loans to 7.25%.

Shares on Wall Street fell on the news as many had been urging a half-point cut, citing growing pressure in wholesale money markets and a loss of earnings momentum. But recent figures showed more jobs were created in November than had been expected.

Rates have come down from 5.25% in September, and further cuts are expected.