"The committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.
"The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.
"Appreciable downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks," it says.
Westpac economists says the size of the move – the largest in the low-inflation era – has surprised everyone.
They say that the Fed's accompanying statement leaves the door open for further action should the market not respond in a positive way.
"In fact the money market is still pricing in another 50 basis point cut at next week's review. There will no doubt be plenty of speculation as to whether the timing of the cut signals panic within the Fed about the deterioration of the US economy – justifying further steep rate cuts – or was intended to break the vicious cycle of pessimism in financial markets, which could cause more damage to the real economy if left to continue."
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