Wall Street cheered yesterday after the US Federal Reserve slashed the cost of borrowing by half a percentage point in one of the most remarkable rate-cutting sprees of recent years.

The Dow Jones industrial average bounced as much as 100 points within seconds of the Fed announcing the cut – the second in eight days – to 3 per cent after Ben Bernanke, the Fed Chairman, said that more rate reductions were possible. although it ended the day down slightly. New York’s Treasury bond market seized on Mr Bernanke’s comments and immediately priced in another half percentage point cut within three months, as the central bank tries to stave off a recession for the world’s biggest economy.

Prospects of a further rate cut in the United States and figures showing that the American economy has stagnated hit the dollar, triggering the Qatari Government to say that it may dump the dollar as its currency peg in the long term.

In the accompanying statement to the rate cut, the Fed said: “Financial markets remain under considerable stress and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labour markets.”

Last Tuesday the Fed stunned world markets when it cut interest rates by three quarters of a percentage point, representing the biggest reduction for 26 years. Yesterday’s cut leaves the cost of borrowing decreased by a third in just over a week.

While the rate cut was seen as an attempt by Mr Bernanke to address Wall Street’s nervousness that credit conditions will deteriorate further, the Fed’s rate-setting group – the Federal Open Market Committee – was presented with the eagerly awaited fourth-quarter US growth figures before they decided on the size of the reduction.

Official gross domestic product figures yesterday showed that during the fourth quarter of 2007 the American economy grew at 0.6 per cent – half the pace of Wall Street’s expectations and the slowest rate for five years. For the year as a whole, the US economy grew at 2.5 per cent, slightly down from 2.6 per cent in 2006.

Kevin Logan, senior economist at Dresdner Kleinwort, the investment bank, said that the GDP numbers did not make the case for a rate cut any more compelling. “This rate cut is entirely about the Fed taking a direct aim at the financial markets. The big worry is that credit constraints intensify and feed further into the deterioration of the housing market. That in turn feeds into consumer spending.”

Mr Logan said of Mr Bernanke: “He’s certainly changed his perception of what is happening in the markets and what he has to do. In the summer he thought that the credit crisis wouldn’t affect the economy. He was wrong. Maybe someone else would have been more forceful early on. His biggest question is: ‘Can he really alleviate the stress on the financial markets by just lowering interest rates?’ ”

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