"Recent information indicates that economic activity remains weak," the Federal Reserve said in a statement.
"Household and business spending has been subdued ... labour markets have softened further, financial markets remain under considerable stress and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters."
The US stock market rose sharply on the bank's decision, with the Dow Jones up 136 points to 12,968, before closing 12 points down.
US to enter recession later this year, with only mild recovery in 2009, IMF says
In April, US jobless percentage reached new high of 5.1 per cent
US Federal Reserve has cut rates seven times since last September in bid to halt financial slowdown
IMF says global losses from mortgage subprime crisis could top $945bn
Biggest losses include $18bn for Citigroup and $14.1bn for Merrill Lynch
George Bush, US president, signed $167bn stimulus package to combat financial crisis in February
Sources: IMF, company reports, US Department of Labour
Al Jazeera correspondent John Terrett said that the move by the Federal Reserve was widely expected and reflects the fact that the bank sees the prospect of a US recession as a very real threat.
Financial markets had assumed this latest cut would be the last in the series, yet the bank said it has left all options open, which is why the dollar has still gone down and the price of oil has still gone up, our correspondent added.
The US economy has been battered in recent months by a downturn in the housing market and the ongoing subprime mortgage crisis, in which people were offered mortgage deals they could not afford to repay.
The US central bank also said in its statement it would continue to monitor inflation, stating concerns that "uncertainty about the inflation outlook remains high".
On April 2 Ben Bernanke, chairman of the Federal Reserve, told US Congress that a "recession is possible," adding that the bank believed there might be a "slight contraction" in the economy in the first six months of the year.
While many economists believe the US to already be in a recession, the expectation is that it will be a short one that could end this summer.
If this is the case, many analysts believe the central bank may hold rates steady for the rest of this year and cut rates next year when the economy is on sounder footing.
This week the first batch of rebate cheques, totalling more than $100bn, were sent to US citizens, a factor that is expected to boost spending.
The rebate cheques formed part of a $150bn economic stimulus package signed into law by George Bush, the US president, in February.
Source: Al Jazeera and agencies