Federal Reserve Chairman Ben S Bernanke adopted the approach of his predecessor Alan Greenspan, reducing interest rates in a bold bid to shield the economy from a housing slump and financial turbulence to pre-empt an economic slump rather than waiting for one to occur.

The unanimous decision by central bank’s policy-makers took the benchmark federal funds rate, which governs overnight loans between banks, down to 4.75 per cent, its lowest since May of last year. The Fed also cut the discount rate it charges for direct loans to banks by a half-point to 5.25 per cent.

It was the first cut in federal funds rate — the Fed’s main tool to influence the economy — since June 2003 and the first half-point cut since November 2002. Policy makers said they based their decision on the “potential” for sell-off in credit markets to hobble economic growth. The cut may help alleviate the worst housing recession since 1991 and ease pressure on the Fed in Congress, where lawmakers had called for cheaper borrowing costs.

Quell criticism
The decrease may also quell criticism on Wall Street that Bernanke, 53, was slow to respond to stress in capital markets. Greenspan pared rates three times in 1998 as currency crises in emerging economies rippled across the globe.

The Fed said in its statement that it “will act as needed to foster price stability and sustainable economic growth.” “Tuesday's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time,” it said.