The Federal Reserve cut interest rates by a quarter percentage point to 2 per cent on Wednesday and signalled its preference to pause at its next meeting in June.

The suggestion of a pause came by way of the Fed dropping its explicit focus on the “downside risks” to growth. It also dropped a pledge to act “in a timely manner” and highlighted the “substantial easing” of monetary policy that has already taken place.

But the overall tone of the statement was more doveish than many in the market expected, with a gloomy assessment of economic conditions and an implicit bias towards growth risks. This raises the possibility that the US central bank could still end up cutting rates further, if not in June then later in the year.

Richard Fisher, president of the Dallas Fed, and Charles Plosser, president of the Philadelphia Fed, dissented in favour of no rate cut. The Fed also cut the discount rate at which it lends directly to banks by a quarter point.

The dollar fell against the euro as investors digested the Fed statement and was 0.3 per cent lower in late afternoon trading, while stocks fell, with the S&P 500 down 0.4 per cent. Bond yields traded lower, with the two-year note at 2.26 per cent.

The Fed move came after data showed the US economy grew 0.6 per cent in the first quarter. However, excluding inventories, real final sales were negative, raising fears that underlying demand may not support continued expansion.

The Fed made relatively few alterations to its assessment of economic conditions, suggesting it did not think the economic outlook had changed substantially since mid-March. This reflects the belief of Ben Bernanke, chairman, that the “tail risks” to growth have not diminished much in spite of the improvement in some financial markets.

The Fed said economic activity “remains weak”, business spending as well as household spending was now “subdued” and labour markets had “softened further”.

Most notably, it made hardly any changes to its evaluation of market conditions and economic risks compared to mid-March.

It said: “tight credit conditions and the deepening housing contraction are likely to weigh on economic growth.”

While many analysts had expected the Fed to toughen its language on inflation, its description suggested inflation risk had if anything decreased slightly.

Earlier, the Bank of England struck a much more upbeat tone as it appeared to signal the end of the credit crisis, saying that prices in credit markets, for instance for US subprime-related securities, “overstate the losses that will ultimately be felt by the financial system”.

Additional reporting by Michael Mackenzie and John Authers in New York, and Chris Giles in London