Mumbai: The US Federal Reserve today slashed benchmark US interest rate by 0.75 percentage points to 3.5 per cent from 4.25 per cent as an emergency support measure for a weak US economy.

The Fed also lowered its discount rate - at which it lends to banks -by similar 0.75 percentage points to 4.0 per cent.

Last week Federal Reserve chairman Ben Bernanke, in his testimony on the economic outlook before the committee on the budget of the US House of Representatives, had said additional policy easing may be necessary to ease the strained financial sector in view of the a contraction in the availability of credit.

 "More-expensive and less-available credit seems likely to impose a measure of restraint on economic growth," Bernake told the committee.  (See: Further easing required, Fed chief tells House budget committee)

The Federal Reserve board, which announced the cut in its federal funds rate after an unscheduled meeting, said the move was aimed at helping a weak economy amidst fears of an impending global financial market meltdown.

This was the biggest rate cut by the Fed since October 1984. It was also the first unscheduled cut since a half-point reduction in September 2001.

The Fed statement cited the broader financial market conditions that have continued to deteriorate and credit that has tightened further for businesses and households.

It also said a deepening of the housing contraction as well as some softening in labour markets was quite likely.

Treasury secretary Henry Paulson, addressing the US Chamber of Commerce in Washington, said he hoped the rate cut would restore confidence in the markets.

Stock markets, however, failed to react. Stocks, in fact, plunged at the open, following two straight days of sell-off worldwide.
 
The Fed has cut the funds rate to 4.25 per cent from 5.25 per cent since September. The Fed has also loaned $70 billion to banks through a series of three auctions since December to help mitigate the effects of the credit crunch on the market.