Mumbai: The Federal Reserve''s Open Market Committee is likely to announce an interest rate cut on Tuesday, to ward off a downturn in US economic growth capped off by a surprising drop in US jobs in August. But the extent to which the rates may drop and how fast is yet uncertain.

The Fed policy-making body is expected to lower its target for the overnight federal funds rate by either one-quarter or one-half percentage point from the current 5.25 per cent.

The rate cut, expected to be announced tomorrow, would be the first since June 2006 and the first under the leadership of Ben Bernanke, who took over from Alan Greenspan as Fed chairman in February last year.

The prospects for a return to sub-par growth after a strong second quarter have even raised the spectre of recession in the US. While economists disagree on the probability of a downturn, they agree that risks have risen.

In Paris, US treasury secretary Henry Paulson acknowledged that bad lending practices were at fault in the crisis triggered by defaults on US mortgage debt, but defended innovative lending practices.

"The whole world, including the US has benefited from innovative financing techniques - innovations like securitisation and credit availability," he told a joint news conference with French economy minister Christine Lagarde.

Some analysts think the Bernanke Fed, whose approach to policy changes seems more deliberative and model-driven than the approach taken by Greenspan, is already behind the curve.

Financial dealers are also split on how the Fed will act, even as some Fed officials have suggested dramatic action may be warranted to offer quick support to a faltering economy.

Others have been more cautious, stressing the economy''s resilience and the importance of not taking unneeded steps that would bail out market participants who have taken a bath with investments tied to sub prime mortgages.

Regardless of the outcome of Tuesday''s meeting, markets anticipate more rate cuts ahead.

Futures contracts measuring expectations for Fed policy suggest benchmark overnight rates will be near 4.5 per cent by year''s-end, three-quarters of a point, or 75 basis points, below their current level, and close to 4.25 per cent by mid-2008.

Fed''s policy tilt is usually followed by a series of rate moves, although the size and speed of subsequent shifts in credit costs can vary.

Since the late 1980s the average reduction in the target rate in an easing cycle has been about 175 basis points, a figure skewed by the 550 basis points reduction seen in 2001 through 2003, according to analysts.

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