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The BBC's Patrick O'Connell
"Wall Street is enjoying some old fashioned feel good, although for the short term"
 real 56k

The BBC's Samanatha Simmonds
"The US Central Bank took much of the world by surprise"
 real 56k

Bank of America's Jeremy Hawkins
talks about the surprise timing
 real 56k

Henk Potts of Barclays Stockbrokers, London
"London would expect to open a lot stronger"
 real 28k

Wednesday, 18 April, 2001, 21:28 GMT 22:28 UK
US interest rates cut

The US central bank, the Federal Reserve, has cut interest rates by half a point to 4.5%.

The unexpected cut on Wednesday is the fourth time this year that US rates have been lowered, as the central bank attempts to counter the threat of recession.

The news of the rate cut sent share prices soaring on Wall Street and in Europe, with the blue chip Dow Jones Industrial Average gaining more than 400 points or 4% within minutes of the news breaking.

Both the Dow and the tech-heavy Nasdaq stock market, which surged more than 8% to more than 2,100 points, held on to their gains.

The Dow closed up 399 points, or 3.9%, at 10,616.

The rate cut decision was taken as evidence mounted that the US economy was slowing dramatically, with consumer confidence plummeting on the back of the stock market collapse.

The Fed hopes that lower interest rates will encourage consumers and businesses to spend more, and thus revive the economy.

Surprising move

In Europe the main stock markets in London, Frankfurt and Paris all gained 2% or more. The FTSE 100 index of leading UK shares closed 2% higher at 5,890.

The Federal Reserve normally announces any change in its interest rate policy after the six-weekly meeting of its Federal Open Market Committee (FOMC).


I've been betting they'd do an intermeeting cut, though I did not expect they would cut as much as this. This is impressive

David Jones, Aubrey G Lonston
The decision was made following an early morning call between Fed chairman Alan Greenspan and FOMC members.

The move comes well before the Fed's next scheduled meeting, on 15 May, and took financial markets completely by surprise.

The Fed last changed rates between meetings on 3 January.

The Fed's reasons

In a statement, the Fed said that since its last meeting several key economic indicators had held up well.

Consumption and housing expenditure had both been relatively strong, although they had flattened recently, and there was still strong underlying growth in industrial productivity.

However, "rising uncertainty about the business outlook" and "persistent erosion in current and expected profitability" had led to the decision to cut rates.

These factors, together with the risk of slower growth abroad, threatened "to keep the pace of economic growth unacceptably weak," the Fed added.

Profits drop

The decision comes during a day in which a succession of America's biggest firms have unveiled sharp drops in profits.

Federal Reserve chairman Alan Greenspan
Greenspan: gambling on an inter-meeting rate cut
The world's largest chip maker, Intel, reported a 64% decline in first quarter profits.

Also in the technology sector, PC and printer maker Hewlett Packard warned that its profits for the three months up to the end of April would not reach expectations, and cut 3,000 jobs.

Investors reacted postively to both announcements, which were slightly better than lowered expectations, boosting Intel and Hewlett Packard shares in early trading on Wednesday.

General Motors and Canada's TRW, which makes products for the automotive, aerospace and information systems markets, also reported sharp drops in profits for the first three months of 2001.

Analysts' reaction

The surprise rate cut underlines growing concern about the speed with which the US economy is losing steam.

David Jones, chief economist at stockbrokers Aubrey G Lonston, said: "I've been betting they'd do an intermeeting cut, though I did not expect they would cut as much as this. This is impressive."


These rates should get the consumer and the economy going again

Craig Ghodash, JW Seligman
Will Braman, chief investment officer at John Hancock, said: "A little bit surprising, but not altogether surprising given the magnitude of some of the commentary we've had out of our very, very large technology companies with regards to the sequential declines they are seeing in their rates of business orders."

Some analysts believe Mr Greenspan will be forced to cut another half point from rates at the Fed's May meeting.

Craig Ghodash, portfolio manager, at JW Seligman, said: "The economy is very weak, and (Greenspan) probably needs to cut another 50 (basis points) in May.

"I think the summer should be the bottom. These rates should get the consumer and the economy going again."

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The Markets: 9:29 UK
FTSE 100 5760.40 -151.7
Dow Jones 11380.99 -119.7
Nasdaq 2243.78 -28.9
FTSE delayed by 15 mins, Dow and Nasdaq by 20 mins

Terror's impact

Signs of a slowdown

Rate cuts

Analysis

Key players

FULL SPECIAL REPORT
See also:

18 Apr 01 | Business
Why Greenspan had to act
18 Apr 01 | Business
Q&A: Will UK rates now be cut?
18 Apr 01 | Business
The Fed statement in full
18 Apr 01 | Business
Wall Street hails rate cut
18 Apr 01 | Business
UK rates set to fall again
18 Apr 01 | Business
US trade gap shrinks dramatically
20 Mar 01 | Business
US cuts rates to 5%
20 Mar 01 | Business
Q&A: Why do interest rates matter?
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