MercoPress. South Atlantic News Agency

US Central Bank cuts interest rate to 4.75%

The decision has been Mr Bernanke's major test to date

US interest rate-setters have decided to cut rates for the first time since mid-2006, from 5.25% to 4.75%, more than had been expected.

Analysts had expected the Federal Reserve to cut rates to prevent a housing market downturn and the" credit crunch" from denting the economy. By making money cheaper to borrow, people can spend and invest more, revitalising the economy, they say. Some wanted the Fed to leave rates on hold to focus on controlling inflation. A reduction in rates by 50 basis points would fuel inflation and lead to the "cheap money" conditions that have brought boom-and-bust to the property sector, they had argued. However after the decision was announced US stocks rallied, with all three major indexes up more than 1%. The Dow Jones industrial average was up 1.37% at 13,587.54, the S&P 500 Index was up 1.87% at 1,504.29, and the Nasdaq was up 1.60% at 2,622.95. The Fed decision was in response to the spreading impact of credit market problems on the rest of the economy. It said "the tightening of credit conditions has the potential to intensify the housing (market) correction and to restrain economic growth more generally". Inflation figuresBut there was better news for those concerned about inflation with the Producer Prices Index (PPI) for August showing a bigger than expected fall. The Bureau of Labor Statistics said that the measure of the prices paid to producers of goods and services in the US fell by 1.4%, which was the biggest fall since October 2006. "The August PPI was good news," said Gary Thayer, chief economist at AG Edwards and Sons in St. Louis. "There was a decline in energy prices that helped pull the overall index down and core inflation looks relatively modest," he added. 'Won't deliver'The Fed made its announcement after its one-day policy meeting. It has coincided with the imminent release of third-quarter results from a string of investment banks. The first of those results, from Lehman Brothers, came in better than expected, suggesting the banks have not been hit as hard as had been thought. The Fed started raising rates from their historic low of 1% back in June 2004 to put the brakes on a US economy that was showing signs of overheating. They had been on hold at 5.25% since mid-2006 after 17 consecutive rises.