Fed reduces US rates again

The US Federal Reserve, anxious to maintain growth in the economy, has reduced interest rates again - cutting its key moneymarket rate by a quarter of a percentage point to 5 per cent.

The news led to a late surge by the US stockmarket, with the Dow Jones industrial index rising by 4.17 per cent in trading last night. This is likely to knock-on to gains in European markets this morning.

The Fed, the US central bank, also lowered the benchmark federal funds rate to 5 per cent and its discount rate to 4.75 per cent.

A Fed statement said a rate cut was "warranted to sustain economic growth in the context of contained inflation". It noted that growing caution by lenders and unsettled conditions in financial markets were likely to restrain overall demand in the future.

While Fed action had been rumoured to be imminent, the move was nonetheless unusual as it came between two regularly scheduled

meetings of the Federal Reserve's policy-setting open market committee.

The committee lowered the federal funds rate by a quarter of a point to 5.25 per cent on September 29th, citing financial turmoil overseas and increasing costs in bank credit in the US. While the cut announced last month was welcomed, it did little to calm jittery investors, who had been counting on a larger reduction.

Within minutes of the Fed announcement yesterday, the Dow Jones Industrial Average shot up 120 points and continued to climb, to close at 330.58 points higher at 8299.36.

The federal funds rate, a target used by banks making overnight loans among themselves, affects the cost of credit throughout the economy.

The more symbolic discount rate is charged by the Fed to memberbanks that borrow from it.

The US had lately come under subtle but unmistakable pressure from such institutions as the International Monetary Fund to take further steps to stimulate growth and thereby help struggling economies in Asia and elsewhere export their way out of a slump.

But there were domestic reasons as well for a rate cut, notably prospects for a sharp slowdown in US economic momentum as lenders - affected by global turmoil - tighten credit policies.

The Fed earlier this month produced a study based on a survey of senior bank loan officers showing "a fairly widespread tightening of standards and terms for commercial and industrial loans to larger firms".

A reduction in the federal funds rate usually prompts banks to reduce their prime rates, charged their best customers, and leads to cheaper credit for consumers, businesses and homebuyers.

Meanwhile, in another development which will encourage the markets, US President, Mr Bill Clinton and congressional leaders announced yesterday they had reached a deal to pass the stalled 1999 US budget, ending a standoff that threatened to shut down the US government.

"This is a very, very good day for America," Clinton told reporters after the agreement was reached.

He said he had preserved his initiative to put 100,000 new teachers into schools around the country, to fund the International Monetary Fund and preserve the Social Security surplus for the future.

"None of this could have been done if we hadn't had a strong united front in both houses," the Democratic president said. See IMF page 2, markets page 8