Stocks to surge as Fed chairman raises prospect of interest rate cuts

Share prices are set to rise sharply on European stock markets today after the chairman of the US Federal Reserve, Mr Alan Greenspan, gave a strong hint that a cut in US interest rates could be on the way.

Financial markets surged on the Fed chairman's remarks, which were his clearest indication yet that the central bank has shifted its policy-making focus from fighting inflation to preventing a sharp slowdown in US growth.

The Dow Jones Industrial Average, extending gains in the morning session, was up 138.76 at 8,035.96, at 2.05 p.m. New York time, five minutes after Mr Greenspan's testimony was released. And it continued the surge, finally closing up 257.21 at 8154.41.

Equity markets in Latin America also reacted positively, while the US dollar weakened against other major currencies.

Mr Greenspan said the global crisis had "infected" US financial markets and warned that its effects on the US economy as a whole were likely to intensify.

"Deteriorating foreign economies and their spill-over to domestic markets have increased the possibility that the slowdown in the growth of the American economy will be more than sufficient to hold inflation in check," he told the Senate budget committee.

The Fed's policy-making open market committee's next meeting is on Tuesday and, while most financial market economists still don't expect the central bank to cut rates then, the chances of a rate cut seemed to rise with yesterday's remarks.

Mr Greenspan said policy makers around the world needed to be especially sensitive to the deepening signs of global distress, which can impact their own economies.

The Fed chairman gave a long list of adverse effects the crisis was having on US financial markets, including lower stock prices, interruptions in fund flows and a more cautious approach by banks to lending.

While he said there was little evidence to date of significant weakness in the economy as a whole, he noted conditions were likely to get worse.

"Disappointing profits in a number of industries and less rapid expansion of sales suggest some stretching out of capital investment plans in the months ahead. Lower equity prices and higher financing costs should damp household and business spending, and greater uncertainty and risk aversion may also lead to more cautious spending behaviour," he said.

Last month, the Fed's open market committee shifted its policy stance away from a bias towards raising rates, to a neutral position, meaning it saw the risks facing the economy as evenly balanced between inflation and recession. But Mr Greenspan's statement yesterday suggested policy makers now saw the risks as tilted more towards a sharp slowdown.

A week ago Mr Greenspan damped expectations of an international cut in interest rates when he told another congressional committee that central banks were not co-ordinating an easing of monetary policy.