The Federal Reserve cut interest rates by a half-percentage point today as part of an aggressive effort to halt a sharp slowdown in an economy hit by a housing slump and a credit crunch.

The Fed’s action takes the bellwether federal funds rate target to 3 per cent, the lowest since June 2005, and comes just eight days after it slashed rates by a bold three-quarters of a point. The follow-up reduction was in line with the expectations of many financial market participants.

Wall Street economists warned Ben Bernanke, the Chairman of the US Federal Reserve, earlier in the day that equity markets would "tank" if the central bank failed to cut interest rates by half a percentage point.

Their forecast followed latest official statistics showed that the US economy had ground to a halt.

US GDP in the fourth quarter of 2007 grew at 0.6 per cent — half the pace of Wall Street's expectations and the slowest rate for five years.

The numbers fuel fears that America is set to slide into a recession.

The Dow Jones industrial average dipped by about 60 points — less than 1 per cent — during the first 20 minutes of trading today as traders digested the grim US growth figures.

The benchmark Dow Jones index — down 11 per cent since the beginning of the year — was trading at about 12,438 points as the market opened.

The Federal Open Markets Committee, which sets US interest rates, convenes today in Washington for the second of a two-day meeting to decide whether to cut the cost of borrowing, which stands at 3.5 per cent.

Wall Street Treasury bonds have already fully priced in a quarter percentage point cut and most of a half percentage point reduction.

The Fed stunned the market last Tuesday when it unexpectedly slashed the cost of borrowing by three quarters of a percentage point to 3.5 per cent, the largest single reduction for 26 years.

As soon as US GDP figures were published, some economists began to speculate that the Fed may decide to cut rates today by an even bigger slice than half a percentage point.

While the growth numbers will make grim reading this afternoon for Mr Bernanke, another report indicated that employment within the private sector rose 130,000 in January, well above the 40,000 consensus.

The most worrying aspect of the GDP figures were statistics showing that consumption had risen in the fourth quarter by only 2.0 per cent, compared with expectations of 2.9 per cent.

Ian Shepherdson, of High Frequency Economics, said: "This means either that October/November have been revised down sharply or that December was truly awful."

He added: "This is clear. Hefty slowing. Expect more in the first half of this year."

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