The US Federal Reserve yesterday cut interest rates by a quarter point - the 11th time this year the US Central Bank has eased the short-term lending rate in its campaign to reinvigorate the world's largest economy.
The Fed funds rate, which governs overnight loans between banks and acts as a benchmark for short-term interest rates, now stands at 1.75 per cent, its lowest level since 1961.
Wall Street took the measure in its stride, having factored it in over the past few days. The Dow went up after the announcement but later plunged by more than 100 points after drug-maker Merck surprised analysts by saying that earnings would be lower than the top end of previous expectations.
Many economists believe the rate-cutting cycle is more or less at an end, and that a recovery is in sight, a view underlined by new data released yesterday. Consumer sentiment, as measured by the University of Michigan, bounced higher for a third straight month in December. Factory orders for costly and long-lasting durable goods also climbed strongly in October. At the same time, retail sales at US chain stores fell more than expected last week, dimming hopes that consumer spending this Christmas could quickly lift the economy out of recession.
The Fed left itself open to yet another rate cut at its next scheduled meeting in January. "Economic activity remains soft, with underlying inflation likely to edge lower from relatively modest levels," said the Fed's policy-making Open Market Committee after its scheduled meeting in Washington.
"To be sure, weakness in demand shows signs of abating, but those signs are preliminary and tentative. The committee continues to believe that, against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future."
The impact of the aggressive Fed policy has been evident in an increase by 10 per cent in the money supply, and the ability of car-makers to offer zero-financing that has boosted automobile sales to record levels this autumn.
The bottoming-out of rates - the Fed can't really go much lower - means there is less incentive by businesses to delay spending at a time when inventories are flat.
Though the Fed is lowering short-term rates, real long-term rates have risen in the last month by as much as one point, a classic sign of a pending economic recovery. The recent "pop" in the stock market - prompted in part by swift progress in the war in Afghanistan - also fits a pattern of an early rally about six months before a recession ends.
"This will be one of the mildest recessions during the post-war period," said economist Mr Sung Won Sohn of Wells Fargo in Minneapolis. "The current recession should end early next year with the economy contracting about one percentage point from the peak."
US manufacturers expect to see a significant improvement in business by the second half of next year helped by low US interest rates, sharp inventory reductions and low energy costs, according to a survey by the National Association of Purchasing Managers. The survey also forecast, however, that manufacturers would slash capital spending in 2002 to cope with less spending due to the recession, which official began last March.
"Economic growth in the US will resume in 2002," the report said, warning that the current 16-month decline in manufacturing could continue for another four to six months.
US wholesalers cut inventories in October at the fastest pace since at least 1992.
