THE FEDERAL Reserve on Wednesday cut US interest rates a quarter-percentage point, a more modest reduction than the five prior cuts this year, but signaled it stood ready to do more to boost a sagging economy.

The Fed action brought the federal funds rate, a benchmark for short-term rates throughout the economy, to 3.75 per cent, its lowest level in more than seven years. The central bank also chopped the discount rate — charged on direct Fed loans to commercial banks — by a quarter point to 3.25 per cent.

The vote on the discount rate change was unanimous. Stocks fell immediately after the announcement, which dashed hopes for a steeper half-point cut, but recovered soon afterward. Economists took heart that the Fed, with its smaller reduction, was taking growing inflation fears into account.

“They are doing the best they can to stimulate the business sector by bringing longer rates down. This will put inflation fear to rest,” said Christopher Low, chief economist at First Tennessee Capital Markets in New York.

There was no explanation in the statement issued after a two-day meeting of the policy-setting Federal Open Market Commi-ttee for why Fed opted for a smaller cut rather than the half-point reduction some economists were speculating.

Fed still sees excessive weakness, rather than inflation, as the main threat to the economy, indicating it may cut rates again should the economy deteriorate further.

“The patterns evident in recent months — declining profitability and business capital spending, weak expansion of consumption, and slowing growth abroad -— continue to weigh on the economy. The associated easing of pressures on labour and product markets are expected to keep inflation contained,” the Fed said. (Reuters)