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The BBC's Patrick O'Connell in New York
"The pundits expect that rates will come down again this year"
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Professor Alan Blinder
"You have to be extremely optimistic to think that a tax cut can avoid a recession"
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Wednesday, 31 January, 2001, 22:02 GMT
US interest rates cut to 5.5%
The US central bank, the Federal Reserve, has cut interest rates by 0.5% to 5.5%.

This is the second rate cut during January, as Fed chairman Alan Greenspan seeks to stop the slowing US economy plunging into recession.

The Fed took the markets by surprise just four weeks ago, cutting rates from 6.5% to 6%.

Wednesday's cut was more widely expected, but opinion was divided about how big the cut would actually be.

An accompanying statement from the Fed stressed that, in spite of Wednesday's cut, the risks are still "weighted towards conditions that may generate economic weakness."

This was widely interpreted in the market to mean that further interest rate cuts are likely when the Fed next meets in May.

Gloomy picture

The bank's statement painted a gloomy picture of the state of the US economy.

The Fed will keep on moving until they get the economy on an even keel

Dick Rippe
Prudential Securities
It said that consumer and business confidence had eroded further, retail sales and business spending had weakened appreciably, and that manufacturing production had been cut back sharply.

The strength of the Fed's statement buoyed expectations of further interest cuts later this year.

"We can feel pretty comfortable that this is the second of a couple more interest rate cuts to come," said Donald Berdine, Chief Investment Officer at PNC Advisors

This raised expectations that the stock markets will begin to recover later this year.

"In an atmosphere of lower interest rates, this inflow of cash should create a pretty big rally," said Greg Smith, chief investment strategist at Prudential.

But corporate growth is not expected to pick up until the second half of the year, since rate cuts can take six months to filter through the economy.

Key indicators

Alan Greenspan, chairman of the Federal Reserve
The man with the power, Alan Greenspan
But whether the world's largest economy is tilting toward recession is still anyone's guess.

Recent economic data out of Washington paints an erratic picture.

Fresh economic data on Wednesday revealed that the US economy grew at its slowest rate for five and a half years in the final three months of 2000, according to official Washington figures.

Gross domestic product (GDP) fell to an annual growth rate of 1.4% during that period.

This followed data released on Tuesday which showed consumer's confidence in the nation's economy at a 10-year low.

But there are also bright spots, such as expectations of much higher car sales in January.

And the US also continues to enjoy historically low unemployment - currently at 4%.

Volatile stocks

The immediate reaction of the US stock markets was mixed, with little consensus seen by observers.

The stock markets had been expecting a 0.5% rate cut, and had already built this into stock prices ahead of Wednesday's announcement.

The financial community had been debating whether the cut would be 0.25% or 0.5%, with some analysts even mooting the possibility of a cut as high as 0.75%.

The blue-chip Dow Jones Industrial Average closed the day just 6 points higher at 10,887.

The broader Standard and Poor's average, made up of 500 firms, slipped just 7 points to 1,366.

And the biggest mover was the Nasdaq, the index of leading technology firms, which lost 2.31% of its value, falling by 65 points to 2,772.73.

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See also:

03 Jan 01 | Business
US interest rates cut
19 Jan 01 | Business
US consumer confidence plunges
19 Jan 01 | Business
The fate of the dollar
26 Jan 01 | Business
Greenspan backs tax cuts
26 Jan 01 | Business
Signs of US soft landing
31 Jan 01 | Business
Sharp US slowdown confirmed
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