As widely expected, the U.S. Federal Open Market Committee decided today to lower its target for the federal funds rate 25 basis points to 4.25%.

It’s the third-straight quarter-percentage-point cut by the Fed.

In its accompanying statement, the FOMC noted that U.S. economic growth is slowing, reflecting slumping U.S housing market and “some softening in business and consumer spending”.

“Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time,” the FOMC said.

The committee said it is keeping a close watch on inflation. “Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation.”

The FOMC added that “Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation.”

It said it “will act as needed to foster price stability and sustainable economic growth.”

This suggests the Fed is open to future cuts.

Voting for the FOMC monetary policy action were: Ben Bernanke, chairman; Timothy Geithner, vice chairman; Charles Evans; Thomas Hoenig; Donald Kohn; Randall Kroszner; Frederic Mishkin; William Poole; and Kevin Warsh. Voting against was Eric Rosengren, who preferred to lower the target for the federal funds rate by 50 basis points at this meeting.

In a related action, the board of governors unanimously approved a 25-basis-point decrease in the discount rate to 4.75%.

Markets may have been a bit disappointed by the Fed’s decision today, but it was more or less what many Bay Street economists expected — and, they are unanimous in expecting more rate cutting ahead.

Markets were hoping for a 50 bps reduction in the discount rate. They were also disappointed by a lack of clear direction on rates in the policy statement.

“Instead of reassuring talk about the future growth path of the economy, or strong promises of more easing to come, the Fed resorted to hedging its bets,” notes CIBC World Markets. “The accompanying policy statement acknowledged that U.S. economic growth is slowing and that both business and consumer spending are softening, but also kept firm on its long-standing view that inflation is also a concern.”

This means that the Fed remains very data dependent, CIBC says. And, it predicts that “a further cut in January is likely, but aggressive steps (beyond quarter-point cuts) aren’t yet being deployed.”

“This policy statement clearly suggests that the FOMC is unsure about where rates are headed next, but we continue to believe that that ongoing tightness in the credit market along with a moderate slowdown in both business and consumer spending will force the Fed to keep lowering its target overnight rate by 25-50 bps over the next two policy meetings,” it concludes.

TD Bank says that the tone of the statement was relatively in line with its expectations. “It is clear that the Fed remains concerned about economic prospects. On one hand, there are clear downside risks to growth. On the other, upside inflation pressures continue percolate, especially as energy and commodity prices could put additional upward pressure on prices. Though the Fed made no specific promises in the statement, we continue to think that there are two more 25 bps rate cuts in the pipeline,” TD says.

RBC Economics expects the fourth quarter GDP report will show that the economy flagged as 2007 came to a close, “setting up for the Fed to ease monetary policy further early next year”.

“There will be additional pressure on policymakers to lower the discount and funds rate if the financial market volatility fails to ebb in the months ahead. We expect the Fed will be ready to cut policy rates again if economic and financial market conditions warrant and forecast another 50 basis points of rate cuts (in two 25 basis point increments) in early 2008,” RBC predicts.

National Bank Financial is maintaining its call for the Fed funds target rate to be dropped to 3% by next summer.