US Federal Reserve cuts interest rates by quarter point to 2%

THE US FEDERAL Reserve yesterday cut interest rates by a quarter point to 2 per cent and hinted at a likely pause at its next policy meeting in June.

However, the US central bank was careful not to suggest that it thinks the rate-cutting cycle is necessarily over, and left open the option of cutting rates in June, or resuming rate cuts later in the year if required.

In announcing its decision, the US central bank pointed to the "substantial" reductions it has already put in place.

It also noted that energy and other commodity prices were on the rise.

It also dropped a reference contained in its last interest-rate announcement that "downside risks to growth remain".

Two Fed officials dissented from the decision to cut rates, preferring no change.

The Fed decision followed new data that suggest that the US economy grew 0.6 per cent in the first three months of this year, avoiding outright contraction due to a build-up in business inventories and continued support from exports.

However, real final sales (excluding inventories) declined as investment fell and consumption slowed.

This suggests that underlying demand may not be enough to support continued expansion.

The report revived the debate as to whether the US is in recession.

Richard Yamarone, director of research at Argus Securities, said that "claiming recession while economic output is expanding is like diagnosing a patient with the sniffles as having pneumonia".

However, John Ryding, chief US economist at Bear Stearns, said "the fact that there was technical growth in GDP in no way alters our view that the economy has fallen into recession".

The official verdict will be made by the National Bureau of Economic Research. It puts "considerable weight" on GDP, but also uses measures such as employment and income.

Many analysts believe the economy will probably contract in the second quarter as companies cut back on inventory.

"The increase in inventories is likely unintentional: corporations were seemingly surprised by the cooling off in demand," said Drew Matus, senior economist at Lehman Brothers.

However, others argue that tax rebates will arrive just in time to boost consumer spending and also keep second-quarter growth positive. - (Financial Times service/ Reuters)