Fed slashes rate in bid to boost US economy

 

After a pause of almost a year, the US Federal Reserve resumed its bold programme of rate cuts yesterday, slashing the overnight lending rates by a full half percentage point in a bid to get the sluggish US economy moving again.

The dramatic cut, announced after a scheduled meeting of the US central bank's policy-making committee in Washington, put the target for the federal-funds rate, which banks charge each other for overnight loans, at 1.25 per cent, the lowest in half a century.

Attention now turns to the European Central Bank (ECB), which looks set to leave interest rates unchanged today, despite repeated calls for a cut to help stimulate the ailing euro-zone economy.

The ECB's Governing Council, which meets in Frankfurt today, has given no indication that it is preparing for a rate cut, usually signalling such moves in advance.

A cut in US rates by the Federal Reserve could encourage the ECB to move in tandem however. If euro-zone rates are reduced, a fall in domestic mortgage rates in the Republic could be expected to follow quickly.

"Today's additional monetary easing should prove helpful as the economy works its way through this current soft spot," the Federal Reserve said in a statement last night after unanimously approving the policy move.

A rate cut had been widely expected after a series of depressing US economic indicators but the size took many analysts by surprise.

Lowering short-term interest rates is a mechanism to stimulate consumers to spend more and for businesses to increase investment and boost economic growth.

The Dow Jones initially fell after the announcement as investors tried to assess whether the size of the cut meant the Fed believed the economy was in worse shape than predicted. Consumer confidence in the US plunged in October, according to the Conference Board, dropping from 93.7 to 79.4, its lowest level in nine years.

The US government also reported last week that unemployment had risen to 5.7 per cent in October as manufacturers cut an additional 49,000 jobs, bringing total job losses in manufacturing to almost two million.

In its statement, the Federal Reserve emphasised concerns about the economic recovery amid rising worries about how a possible war with Iraq would affect consumer and business confidence. "Incoming economic data have tended to confirm that greater uncertainty, in part attributable to heightened geopolitical risks, is currently inhibiting spending, production and employment," it said.

The Fed last cut rates on December 11th after an aggressive year-long campaign of almost monthly cuts to promote economic activity during the 2001 recession.

The US economy grew at an annual rate of 3.1 per cent in the third quarter of this year according to provisional government figures but is expected to slump to 1 per cent in the current quarter.