The Federal Reserve lowered the benchmark American interest rate by a quarter point to 2% and indicated it’s ready to pause after seven cuts since September.

“The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time,” the Federal Open Market Committee said in a statement after meeting yesterday in Washington. The central bank also warned that “some indicators of inflation expectations have risen in recent months.”

Chairman Bernanke and his colleagues dropped a reference to “downside risks” to the economy, while acknowledging the damage that the housing slump has wrought on the six-year expansion. Stocks surrendered gains on speculation the most aggressive monetary-policy easing in two decades is approaching an end.

“We do not expect to see a rate cut at the next few meetings without a substantial contraction of the economy,” the chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, ” Christopher Rupkey, said. “We are not yet to Memorial Day weekend, but the Fed effectively told us today to take the summer off.”

Oil prices reached another record high of $119.93 a barrel on April 28. The Fed said indicators of inflation expectations have risen.

“The committee expects inflation to moderate in coming quarters, reflecting the projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization,” the Fed added. “It will be necessary to continue to monitor inflation developments carefully,” the Fed said.

At the same time, the economy is faltering. Hours before the Fed decision, the Commerce Department reported that gross domestic product increased at an annual pace of 0.6% last quarter. Spending by households, the biggest part of the economy, grew at the slowest pace since 2001, when the American economy was in a recession.

The Fed Board of Governors also voted to lower the discount rate, the cost of direct loans from the central bank, to 2.25%. Officials reduced the normal 1-point spread over the federal funds rate in August to a half point to ease liquidity constraints. They further narrowed the difference on March 16, in the first weekend emergency move since 1979.

The president of the Dallas Fed, Richard Fisher, and the president Philadelphia Fed, Charles Plosser, dissented from yesterday’s decision, preferring no change. They also objected to last month’s reduction.

Central bankers have reduced the target rate for overnight loans between banks by 2.25 percentage points in 2008 with a series of aggressive rate actions, including two three-quarter point cuts. In addition, the Fed invoked emergency authority in March to start lending directly to investment banks. The central bank also provided $29 billion of financing to secure JPMorgan Chase & Co.’s takeover of Bear Stearns Cos.

The actions have reduced risk premiums for financial firms, and stock prices have climbed since the previous Fed meeting on March 18.

The Standard & Poor’s 500 Index has rallied since Fed officials last met. Yields on five-year debt of Fannie Mae, the largest American mortgage company, have fallen to 0.56 percentage points over Treasury notes of similar maturity, down from 0.90 percentage point.

The world’s biggest financial companies have posted at least $312 billion in writedowns and credit losses since the start of last year as the subprime mortgage market collapsed.

American foreclosure filings more than doubled in the first quarter as payments rose for subprime adjustable mortgages. One in every 194 American households, or 650,000 properties, were in some stage of foreclosure during the quarter, according to Irvine, Calif.-based RealtyTrac Inc., a vendor of data.

While easing borrowing constraints, the central bank has also pushed money market yields below inflation, giving consumers an incentive to spend or take on more risk in their investments to earn a return. The Fed’s preferred inflation barometer, the personal consumption expenditures price index, minus food and energy, rose at a 2.2% annualized rate in the first quarter. Six-month Treasury bills yield 1.7%.

Public expectations of inflation five years ahead rose to 3.2% April, the fastest since October 2005, as measured by a Reuters/University of Michigan survey.

“The two dissents show they are still worried about inflation,” the chief economist at Chicago-based Mesirow Financial Inc., Diane Swonk, said. “This is a Fed ready to watch from the sidelines.”