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The US Federal Reserve has announced it is cutting the country's benchmark interest rate to 4.75 per cent in order to ease growing economic pressures.

The reduction in the base rate represents a significant drop of 0.5 percentage points, double the normal adjustment of 0.25 per cent.

It is the first rate cut in four years and policymakers have been forced to make the concession to the net borrowing rate in order to protect the world's leading economy from the impact of a downturn in the housing market and ongoing turmoil in the financial markets.

The rate cut has been greeted positively by many borrowers and lenders in the US who have endured weeks of turmoil amid uncertainty over the economy, which has in turn had a knock-on effect on the major markets around the world.

Nevertheless, analysts remain divided as to the effect the reduction in the cost of borrowing could ease the pressures, with some claiming it may lead to heightened inflation and exacerbate the existing problems.

Speaking to the Reuters news agency yesterday, former Fed chairman Alan Greenspan said that the US central bank faces greater risks from inflation at the present time than it did between 2001 and 2003 – when interest rates were slashed under his tenure.

"We could ease without fear of stoking inflationary pressures," said Mr Greenspan, who is currently promoting his memoirs.

"We couldn't do that in today's environment."

Last month, current Fed chairman Ben Bernanke hinted that the US central bank was prepared to take action to limit damage to the wider economy in the wake of ongoing turbulence in the financial markets caused by a housing slump.

Rising default levels in the US sub-prime mortgage market, which makes home loans available to those on low incomes or with poor credit ratings, have prompted fears that a resulting credit squeeze could begin to harm the economy.

An official report published at the beginning of this month showed that the US suffered its first fall in employment for four years in August, adding to calls yesterday for borrowing costs to be cut from their previous 5.25 per cent level.

The benchmark US interest rate had been on hold since mid-2006, having previously undergone 17 consecutive rises.

The Fed began raising rates from a historic low of one per cent back in June 2004 in order to prevent the US economy from overheating.