Concern about the state of the US economy has prompted the Federal Reserve Board (Fed) to move swiftly to reduce its key interest rate in an attempt to bolster confidence and support growth. The move comes weeks earlier than expected - a cut had not been anticipated until the next formal meeting at the end of January - and the decision to reduce rates by a full half point is the first such reduction since the autumn of 1998.
The US stockmarket responded positively, but it will be some time before it is clear whether the move will allay fears about the economy's health. Recent US economic data have indicated that growth is slowing. A survey by the US National Association of Purchasing Managers - showing manufacturing activity in December at a 10-year low - may have been the final piece of evidence which persuaded the Fed to act.
In its statement accompanying the rate cut announcement, the US central bank pointed to signs of weakening sales and production , falling consumer confidence and the impact of higher energy prices on purchasing power. As inflationary pressures remained weak, it said, an interest rate cut was clearly justified.
The Fed can certainly not be accused of delay in responding to the economic signals. It has moved quickly to cut interest rates in a way which should have a significant impact on economic confidence. Its chairman, Mr Alan Greenspan, has a well-earned reputation for management of monetary policy which has helped to sustain the long period of strong growth. In part the move is an admission by the Fed that up to now it has underestimated the extent of the slowdown. That said, in the light of the recent evidence, it is welcome.
The financial markets responded positively with share prices shooting higher. However the Fed will be more concerned about the impact on business and consumer confidence. It remains to be seen whether the reduction will be enough to give a lift to consumer spending and business investment, which have both slackened markedly over the last couple of months. The Fed move will lower borrowing costs, but it also underlines the extent of its concern about the economic outlook. The central bank is thus likely to stand ready to cut interest rates again over the coming weeks if the economic signals remain poor.
For the Irish economy, the determination of the Fed to keep the US economy on a path of stable growth is welcome. Fears that the US could slip into recession have cast doubts over the outlook for our own economy, as it would have affected both inward investment and exports. If instead of slipping into recession, the US economy merely slows somewhat, that will provide a much more favourable backdrop for Ireland over the next couple of years.
Figures from IDA Ireland yesterday, indicated that inward investment from the US and elsewhere continues to contribute significantly to growth here. Separately, the exchequer returns for last year provided further evidence of the momentum of economic growth. If the Fed can help the US economy to avoid recession, then these - and other - positive indicators of Irish economic growth are likely to be sustained throughout this year.