The US Federal Reserve chairman Ben Bernanke and his central bank colleagues slashed key interest rates by half a per cent (50 basis points) on Tuesday 18 September. The first cut since 2003, it is a radical move that seeks to prevent a major housing slump and a crippling credit crunch from driving the world''s largest economy into a recession.

The Fed funds rate, which had been held at 5.25 per cent since June 2006, was lowered to 4.75 per cent. The funds rate is the interest that banks charge each other. At the same time, the Fed cut its discount rate for direct loans to banks by a half per cent, to 5.25 per cent.

Wells Fargo, Bank of America, and many other commercial banks quickly announced that they were slashing their prime-lending rate by a half-point, to 7.75 per cent. The cut is likely to lead to a lowering of borrowing costs across the economy, for consumers and businesses alike.

The reverberations were immediately felt on Wall Street, which celebrated by driving up the key Dow Jones index by 336 points, the biggest one-day jump in nearly five years.

Economic and political pressure has been building up on the Fed to act. Politicians, shaken by record-high home foreclosures, welcomed the move. The action is intended to help forestall some of the adverse effects of a slumping housing real estate and housing market on the broader economy.

Official figures showed that US producer prices fell 1.4 per cent in August, far more than had been expected. This was the steepest fall since October, and followed a higher-than-normal 0.6 per cent increase in July, the US Labour Department said. Analysts say that overall weakness in the US economy has made it harder for manufacturers to raise prices.

Whether Bernanke can handle the crisis successfully is the biggest challenge he has faced so far in the 19 months he has been at the helm of the Fed. "Today''s action is intended to help forestall some adverse effects on the economy that might otherwise arise from disruptions in financial markets and to promote moderate growth over time," the Fed said in a statement released after its closed-door meeting.

The Fed''s action means rates will drop on a variety of loans. It will become less expensive for people to finance credit card debt and for homeowners to take out popular home equity lines of credit, which are used to pay for education, home improvements or medical bills.

It will also help some homeowners whose adjustable rate mortgages reset in the fall. But, say experts, the rate reduction could take three to nine months to ripple through the economy and bolster overall activity.

Notwithstanding that, they say, the aggressive action has underscored the Fed''s resolve. Analysts predict the Fed will lower rates again, probably by a more modest quarter per cent, at its next meeting in October. Yet another rate reduction could come in December, the last meeting of this year, if the economy is seen to falter. The Fed itself has left the door open to another rate move: It said it will "act as needed to foster price stability and sustainable economic growth".

The Fed''s own economic assessment of the present situation is sombre: "The tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally," it said.

What that means is that the troubled housing market and credit problems could short-circuit the six-year-old economic expansion that the US has enjoyed. Financial turmoil has sharply intensified since the Fed''s last scheduled meeting in early August.

If ordinary people and businesses cut back on spending and investment, it could throw the economy into a tailspin. Tuesday''s rate cut aims to make sure that doesn''t happen. But the economy is not quite on track as yet, and the situation for the Fed could become tricky.

In a media interview on Monday 17 September, former Fed chairman Alan Greenspan said the odds of a recession are growing. He said the odds had moved up to more than one-third, but wasn''t near 50:50 as yet. Earlier this year, his prediction of a one-in-three chance of a recession had caused Wall Street to nosedive.

Analysts expect the economy to slow down. The expected growth rate, of about 2 per cent in the ongoing July-to-September quarter, would be just half the growth rate of the previous three months. Widely expected fears have been that growth in the final three months of this year could turn out even weaker.

A free flow of credit is vital for the smooth functioning of the national economy. If credit becomes too difficult to get, it can damage peoples'' ability to buy assets and goods like homes, cars and appliances. This, in turn, can crimp the capital investment plans and employment numbers of businesses.

US employers cut 4,000 jobs in August. This is the first time the economy has lost jobs in four years. The unemployment rate, now at 4.6 per cent, is expected to move closer to 5 per cent by the year''s end.

The US is suffering its worst housing slump in 16 years. Higher interest rates have squeezed homeowners; especially ''sub prime'' borrowers with low incomes and limited ability to repay loans.

Late payments have shot up, and there have been record numbers of foreclosures. A number of housing lenders have been forced out of business. Hedge funds and other investors in subprime-related mortgage securities have got clobbered. The unsettling issue is that the credit crisis has spread beyond the subprime market, badly affecting more creditworthy borrowers.

Bernanke and his colleagues were accused of being out of touch with reality when they held the key interest rate steady at 5.25 per cent in the Fed''s last meeting on 7 August. Just days later, the Fed was forced to pump in billions of dollars into the US financial system, to get distressed institutions out of the sub prime pit. Then, on 17 August, the Fed took even more aggressive action and cut its lending rate for banks. That the Fed has lowered that lending rate again on Tuesday shows that the woes of the US economy are far from over.

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