The US Federal Reserve is set to cut American interest rates today, making its first change in policy for 15 months as it moves to shore-up an American economy that is faltering in the face of a slumping housing market and the global credit squeeze.

Markets and investors are on alert for a decision from the Fed’s rate-set-ting Open Market Committee (FOMC) today amid uncertainty over whether it will end its long period of stable policy with only a tentative quarter-point cut in the key Fed Funds rate, or go further and order a half-point reduction.

Wall Street economists are split over the likely scale of the Fed’s move, with about a third of more than 90 analysts polled by Reuters last week expecting an aggressive half-point cut.

A half-point reduction would lower the official Fed Funds target rate, the benchmark for overnight lending in the US money markets, from its present 5.25 per cent, to 4.75 per cent.

Today’s widely-anticipated cut will be the first under the leadership of Ben Bernanke as Fed Chairman.He and fellow members of the FOMC are under mounting pressure to act decisively with a half-point move as Wall Street remains in the grip of credit market turmoil and US politicians grow increasingly fearful over the outlook for America’s real economy and jobs market.

Pressure for the Fed to take strong action intensified after recent official figures showed that August saw the first absolute monthly fall in US employment for four years. US employers cut their payrolls by a net 4,000 last month. Sentiment was dealt a further blow as revisions to previous months’ figures also showed that employment across the US economy rose by only a very modest 69,000 in June and by 68,000 in July.

Overall, these figures pointed to average gains in the numbers of Americans in work of only 47,000 a month in the past three months and economists noted that, historically, the Fed has begun to cut rates when numbers of jobs created fall below 100,000.

However, the Fed has to be careful to balance its worries over the outlook for jobs and the economy against its still lingering concerns over persistent inflationary pressures. Its quandary over how quickly and aggressively to act is deepened by the inflationary impact of a renewed surge in oil prices, which last week breached $80 a barrel for the first time.

Paul Ashworth, US economist at Capital Economics in London said that it sees a quarter-point cut in rates today as the most likely Fed verdict. But he added: “A half-point move cannot be ruled out. The Fed began its last [rates] loosening cycle with a half-point cut in early 2001.”

Mr Ashworth suggested that the Fed could attempt to placate markets with a quarter-point cut linked to a statement making clear that further action is on the cards.

The money men

— The Federal Open Market Committee (FOMC) is part of the Federal Reserve System (America’s central bank). Under the Federal Reserve Act of 1913, it is responsible for influencing the availability and cost of money and credit to help to manage the economy (monetary policy)

— The 12-person committee meets eight times a year and votes on whether to raise, lower or maintain the so-called Federal Funds target rate, which anchors the market rates that commercial banks charge on overnight loans between themselves. Each FOMC member has one vote and the decision comes down to a straight majority, although it is usually rare for more than one or two people to depart from the party line

— Normally, the committee is comprised of the Fed’s seven-member board of governors, appointed by the US President, along with five of the 12 presidents of regional Federal Reserves, who serve one-year terms on a rotating basis. At present the committee includes only ten people because two members, Elizabeth Duke and Larry Klane, have been nominated but not confirmed

— The Board of Governors’ present members are: Ben Bernanke, Fed Chairman; Donald Kohn, vice-chairman of the board; Randall Kroszner; Frederic Mishkin; and Kevin Warsh

— The regional Fed presidents voting on the FOMC are: Timothy Geithner, the committee’s vice-chairman and president of the New York Fed; Charles Evans, Chicago Fed; Thomas Hoenig, Kansas City Fed; William Poole, St Louis Fed; Eric Rosengren, Boston Fed

— The Fed “dual mandate” requires it to meet two aims: to curb inflation to deliver price stability, and to promote growth to ensure that employment is maximised

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