Slump fear as US cuts rates

FEARS are growing that the US is on the brink of recession after the US Federal Reserve stunned international markets by cutting interest rates by half a per cent.

Yesterday’s move will be seen by many as a panic measure and further evidence that the current US economic slowdown is turning into recession.

The Federal Reserve reduced the federal funds rate from its nine year high of 6.5 per cent to 6 per cent, its first cut in two years, rather than waiting for its scheduled rate setting meeting later this month.

It is the first time the Reserve has cut interest rates between regular rate setting meetings since October 1998, when the Asian currency crisis threatened to envelope financial markets. The Federal Reserve said the cut was necessary to combat a weakening in the US economy.

The reduction prompted a massive rise in share prices. The Dow Jones industrial average jumped over three per cent on the news, while the Nasdaq surged more than 11 per cent. The dollar also saw its biggest gain in a month against the euro, rising 1.7 to 93.5 cents.

The move will increase the pressure on other central banks to cut interest rates.

But Mervyn King, deputy governor of the Bank of England, warned that a cut in US interest rates would not necessarily be followed by a similar reduction in the UK.

He said: "What matters to us is the outlook for the British economy. We set interest rates for the UK, not the US."

He added that a slowdown in the US economy had been desirable as it had been growing at an unsustainable pace.

The only European market still open when the announcement was made was Germany, where the leading Dax index jumped 6 per cent within minutes of the announcement.

A spokesman for the Federal Reserve said: "These actions were taken in light of further weakening of sales and production and in the context of lower consumer confidence, tight conditions in some segments of financial markets and high energy prices sapping household and business purchasing power."

President-elect Bush, who spent yesterday holding an economic summit with business leaders, has said Congress should pass his proposed US$1.3 trillion tax cut programme "as an insurance policy" against a potential economic downturn.

Michael Glackin Business News Editor Thursday, 4th January 2001 The Scotsman

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-- Martin Thompson (mthom1927@aol.com), January 03, 2001

Answers

Thursday 4 January 2001 Fed springs rate cut to curb recession fears By Andrew Cave in New York

ALAN GREENSPAN and the US Federal Reserve yesterday took decisive action to revitalise America's stuttering economy, making the largest cut in interest rates for eight years in a bid to prevent the current slowdown becoming a full-blown recession. The surprise 50 basis points reduction in the federal funds rate to 6pc was the first half-percentage rate cut in that rate since 1992 and the first time for more than two years that rates have been cut between meetings of the Fed's rate-setting open market committee.

The move, and an accompanying quarter percentage point drop in the less widely used discount rate to 5.75pc, electrified the stock market but baffled analysts, who had expected no change in rates until the committee's next meeting on January 30.

The Dow Jones Industrial Average immediately spiralled 372 points higher while the Nasdaq, which dropped 8pc on Tuesday, shot up 277.02 or 12pc. Brian Robinson, of strategists 4Cast said "I am flabbergasted. I had to do a double-take on the screen. It almost smells like these guys are a little panicked."

The Fed said its action was taken at a conference call of committee members "in the light of further weakening of sales and production and in the context of lower consumer confidence, tight conditions in some segments of financial markets and high energy prices sapping household and business purchasing power."

The size and timing of the reduction brought back memories of the Fed's quickfire reaction in the autumn of 1998 when it cut rates three times within six weeks to forestall a credit crunch in the wake of the economic crisis in Russia.

Analysts said Mr Greenspan was probably influenced by the worst Christmas sales for nearly a decade and Tuesday's poor manufacturing data. Henry Willmore, chief US economist at Barclays Capital, said: "This is one of the more surprising moves the Fed has made in a long time. I'm a little puzzled by some of the things they cited: low consumer confidence and high energy prices."

Paul Christopher, of AG Edwards & Sons, said: "The Fed should have cut rates in December. This says 'I'm not sure'. Fundamentals still point to a soft landing." However, president-elect George W Bush said he was pleased with the move, adding that it would not derail his plans for a $1.3 trillion tax cut package. "I think the cut was needed," he said. "It was a strong statement that measures must be taken to make sure our economy does not go into a tailspin."

In London, before the Fed's unexpected decision, the pound surged almost a cent against the dollar to close at $1.5047, the first time it has topped $1.50 since mid-August. The euro lost half a cent against the pound, ending the day at 62.84p.

However, the single currency, which closed at 94.56 cents to the dollar in London, plunged in New York, dropping below 93 cents in late trading. The pound continued to trade around $1.5050.

http://www.telegraph.co.uk/et? ac=002549632124328&pg=/et/01/1/4/cnlead04.html

-- Martin Thompson (mthom1927@aol.com), January 03, 2001.