I've been betting they'd do an intermeeting cut, though I did not expect they would cut as much as this. This is impressive

David Jones, Aubrey G Lonston

The decision was made following an early morning call between Fed chairman Alan Greenspan and FOMC members.

The move comes well before the Fed's next scheduled meeting, on 15 May, and took financial markets completely by surprise.

The Fed last changed rates between meetings on 3 January.

The Fed's reasons

In a statement, the Fed said that since its last meeting several key economic indicators had held up well.

Consumption and housing expenditure had both been relatively strong, although they had flattened recently, and there was still strong underlying growth in industrial productivity.

However, "rising uncertainty about the business outlook" and "persistent erosion in current and expected profitability" had led to the decision to cut rates.

These factors, together with the risk of slower growth abroad, threatened "to keep the pace of economic growth unacceptably weak," the Fed added.

Profits drop

The decision comes during a day in which a succession of America's biggest firms have unveiled sharp drops in profits.

Greenspan: gambling on an inter-meeting rate cut

The world's largest chip maker, Intel, reported a 64% decline in first quarter profits.

Also in the technology sector, PC and printer maker Hewlett Packard warned that its profits for the three months up to the end of April would not reach expectations, and cut 3,000 jobs.

Investors reacted postively to both announcements, which were slightly better than lowered expectations, boosting Intel and Hewlett Packard shares in early trading on Wednesday.

General Motors and Canada's TRW, which makes products for the automotive, aerospace and information systems markets, also reported sharp drops in profits for the first three months of 2001.

Analysts' reaction

The surprise rate cut underlines growing concern about the speed with which the US economy is losing steam.

David Jones, chief economist at stockbrokers Aubrey G Lonston, said: "I've been betting they'd do an intermeeting cut, though I did not expect they would cut as much as this. This is impressive."

These rates should get the consumer and the economy going again

Craig Ghodash, JW Seligman

Will Braman, chief investment officer at John Hancock, said: "A little bit surprising, but not altogether surprising given the magnitude of some of the commentary we've had out of our very, very large technology companies with regards to the sequential declines they are seeing in their rates of business orders."

Some analysts believe Mr Greenspan will be forced to cut another half point from rates at the Fed's May meeting.

Craig Ghodash, portfolio manager, at JW Seligman, said: "The economy is very weak, and (Greenspan) probably needs to cut another 50 (basis points) in May.

"I think the summer should be the bottom. These rates should get the consumer and the economy going again."