Further reduction in interest rates expected as Fed meets amid deepening recession

It has almost become routine. The Fed meets; the Fed cuts rates. The US Federal Reserve policy-making committee holds a scheduled meeting today in Washington, and Wall Street fully expects that it will announce a rate cut as it has done nine times this year already.

As always stocks powered ahead as investors gambled - without much precedent to go on this year - that another rate reduction would help encourage business spending and jump-start the sluggish economy. The rally was helped however by anticipated good news from Cisco Systems, the biggest supplier of networking gear, which was expected to announce after the closing bell that lagging sales were near a turnaround. Wall Street was also buoyed by the US Treasury's decision last week to stop selling 30-year bonds, an action that is likely to send money flowing from bonds into stocks and could do more to boost the money supply, hold down longer term interest rates and ultimately improve consumer confidence than any series of interest rate cuts, some analysts say.

The performance of the US equity markets has defied the recent series of bleak announcements about the performance of the economy. The Dow has recovered 14 per cent from its post-September 11th lows and the Nasdaq 25 per cent.

Financial markets in New York also expect the European Central Bank to cut rates this week after data released yesterday showed that inflation in the Euro zone fell for the fifth consecutive month, from 2.5 per cent in September to 2.4 per cent in October.

However neither in the US or Europe has recent monetary policy succeeded in sustaining growth.

In one of the worst sets of economic data since the slowdown began, US unemployment figures on Friday showed that the jobless rate across America had shot up from 4.9 to 5.4 per cent. Only 13 months ago the unemployment rate was 3.9 per cent.

Now even white collar jobs are drying up and unemployment seems to be heading for six per cent for the first time since 1994.

This plus the fact that inflation has remained negligible makes it more likely that the Federal Reserve will cut its benchmark rate target today by as much as half a percentage point to 2 per cent.

The classic elements of recession are now in place, combining a fall in employment, lower incomes and a slump in manufacturing.

Many analysts are now predicting, on the strength of the deterioration in the employment market, that the recession could be more severe that the 1990-1991 period of negative growth which was relatively shallow.

The Federal Reserve Bank of Chicago said yesterday that for the 15th straight month its monthly National Activity Index was below zero, also suggesting strongly that a recession - two consecutive quarters of negative growth - is well under way.

Even further evidence of deepening recession came yesterday from the National Association of Purchasing Management, which said that the US service sector contracted sharply in October as the September 11th attacks aggravated already-weak conditions in the economy.