INTEREST RATES:FOR DAYS, the US markets have been abuzz with speculation that the credit freeze and the worsening economic conditions would lead Federal Reserve to review its stance on interest rates writes Arthur Beesley, Senior Business Correspondent on Wall Street

Confirmation that a cut was on the cards came yesterday afternoon when Fed chairman Ben Bernanke indicated the central bank was ready to lower the rate as a result of the deteriorating economic outlook and waning inflation concerns. "In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate," he told the National Association for Business Economics in a speech yesterday afternoon.

Having declined to lower rates as recently as last month, even as volatility in the financial markets erupted into unrestrained turmoil, his speech was received as a clear signal that the 2 per cent target rate will soon be reduced again.

Given the Fed's strenuous interventions to unlock the ongoing seizure in the credit markets, a move in the direction of a rate cut points to a perception among policy-makers that the totality of current efforts is insufficient to offset recession. It also represents a departure from the view that a lowering of rates was likely have little impact on economic activity while credit markets are frozen.

"The combination of the incoming data and recent financial developments suggests that the outlook for economic growth has worsened and that the downside risks to growth have increased," Mr Bernanke said. "At the same time, the outlook for inflation has improved somewhat, though it remains uncertain."

Still in question is the extent to which the rate will be cut and when. The Fed's next scheduled meeting is on October 28th and 29th, but many analysts speculate it may move sooner than that.

Although futures prices point to a strong probability of a half-point cut, traders have increased bets on the possibility of a three-quarter point cut. A three-quarter point cut outside the scheduled round of meetings would mirror the emergency action taken by the Fed last January, described then as a "once in a generation" move.

But the Fed is no stranger these days to exceptional action. After moving on Monday to pay interest for the first time on the cash reserves banks hold at the central bank, it took yet more radical action yesterday with a plan to buy an unspecified amount of commercial paper from companies.

In the face of continuing pressure on the market for this important source of short-term corporate lending, the manoeuvre was designed to ensure that this channel of credit remains open.

"Clients will be thrilled with this. We're only about a week away from the impacts of this affecting all businesses," said a professional adviser to big US firms.

However, this action, announced before markets opened, had little initial effect on money markets and the S&P 500 index was down a further 2.47 per cent in afternoon trading in New York.