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The BBC's Rory Cellan Jones in New York
"The bankers in Washington may have to act again"
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The BBC's Andrew Walker
"The statement issued by the Fed did not mention the word recession"
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Tuesday, 20 March, 2001, 20:02 GMT
US cuts rates to 5%
US interest rates are coming down quickly
Interest rates in the United States have been cut by 0.5% to 5.0% by the Federal Reserve.

The move is intended to help stabilise the US economy, which has moved in the past few months from an economic boom to a sharp slowdown, with consumer and business confidence falling fast.

Persistent pressures on profit margins are restraining investment spending, and, through declines in equity wealth, consumption

US Federal Reserve
And it may help stabilise the world's stockmarkets, which have dropped by around 20% since the last US rate cut in January.

But it may be too little, too late to calm financial markets, faced with falling company profits and fears of a bear market.

A little while after the move, the US stockmarket fell back from its earlier gains, as many traders were hoping for an even bigger interest rate cut.

At the beginning of the year, US interest rates stood at 6.5%.

I think the Federal Reserve is behind the curve and is not contemporaneous with current and prospective economic events

Henry Kaufman, financial analyst
In its statement, the Fed said that there was the prospect of further economic weakness, leading to speculation that there might be further rate cuts to come.

Speaking on the BBC's World Business Report, economist Cathleen Stephansen said that while economic indicators make a case for only a 0.50% cut, the Fed needed to do more to assuage consumers and businesses alike that the US economy is on a sound footing.

But Frank Waung of SG Cowen said:

"We think this is consistent with what is needed in the real economy and this is right on track with what we were expecting."

Slowing economy

The markets are hoping that the combination of interest rate cuts, and tax cuts later in the year, will mean that the US slowdown is short-lived.

And many are now expecting another rate cut, possibly before the next Fed meeting on 15 May.

So far there are few signs of recovery, after the US economic growth slowed from over 5% in the summer of 2000 to just over 1% by the last three months of last year.

Consumer and business confidence has plummeted, with sales of 'big-ticket' items like automobiles very weak.

Many companies, especially in the high-tech sector, have started laying off workers, reversing their rapid growth in the last few years.

And the chairman of the Federal Reserve, Alan Greenspan, recently told Congress that the slowdown still had some way to run.

The Fed warned in its statement that "persistent pressures on profit margins are restraining investment spending, and, through declines in equity wealth, consumption."

And it added that "the potential for weakness in global economic conditions suggest substantial risks that demand and production could remain soft."

However, some analysts thought the statement showed less urgency than in January.

"I think the Federal Reserve is behind the curve and is not contemporaneous with current and prospective economic events and with recent financial developments," said respected financial analyst Henry Kaufman.

Worried markets

Meanwhile, the news did little to reassure stockmarkets have gone into reverse, as more companies warned that they would have lower profits than expected.

Despite the two Fed rate cuts in January, the US stockmarket has fallen back by more than 20%, as blue-chip companies joined in high-tech sector in retreat.

And the stockmarket worries have spread around the world, with high-tech stocks in Europe and Asia also suffering.

There are fears that economic weakness in the United States will be combined with a banking crisis in Japan, as the two biggest economies in the world go into reverse.

Hopes of a recovery were boosted when the Japanese central bank cut interest rates to zero on Monday to help counteract the Japanese slowdown.

In the UK, the Bank of England's Monetary Policy Committee, which has already lowered rates in February, is widely expected to make a further rate cut later this spring.

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See also:

20 Mar 01 | Business
Q&A: Why do interest rates matter?
20 Mar 01 | Business
Markets rise on 0.5% US rate cut
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