Al Jazeera's John Terrett in New York said the cut was "yet another sign of how serious the potential slowdown in the world's biggest economy is".
Terrett added that the rate was likely to be cut to zero per cent before long.
The US government said earlier on Tuesday that consumer prices had fallen a record 1.7 per cent in November.
|The US has suffered an economic slowdown sparked by a housing crisis [GALLO/GETTY]
The fall was the second straight month of record declines in the consumer price index (CPI) and the biggest since 1947, when the Labour Department began recording the figures, it said on Tuesday.
Analysts said the sharp fall has essentially wiped out any inflation threat and instead increased fears of deflation, where prices, earnings and economic activity slump with ensuing enonomic hardship.
The drop was largely attributed to a slump in oil prices, with energy prices falling by a record 17 per cent in November, almost double the 8.6 per cent decline in October
A private research group said earlier this month the US had entered a recession in December 2007, much earlier than anticipated, and George Bush, the US president, acknowledged a few days later that was the case.
In other economic news the US commerce department said construction of new homes fell in November by 18.9 per cent, the biggest drop in a quarter of a century.
The decline put the number of new homes constructed at an annual rate of 625,000 homes, the slowest pace on records dating back to 1959.
Investment giant Goldman Sachs reported a $2.12bn loss in the fiscal fourth quarter to November, the first loss since the investment firm went public in 1999.
Goldman Sachs was the last of two major independent investment banks which became bank holding companies earlier this year, in a bid to have easier access to credit to survive the current financial crisis.