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Wednesday, 18 April, 2001, 19:52 GMT 20:52 UK
Why Greenspan had to act
BBC business editor Jeff Randall
With US consumers burdened by record levels of debt, the time was right for a cut in interest rates, says BBC Business Editor Jeff Randall

While US stockmarkets cheer the Federal Reserve's surprise half-a-point rate cut to 4.5%, consumers all over America are breathing a sigh of relief.

Personal debt is running at record levels, with the average US household owing $8,000 on credit cards alone.

That's fine as long as stockmarket gains boost personal wealth, and unemployment remains low.

But this year, America had seen a sharp downturn in share prices and, worse still, jobless figures have been creeping upwards - a double whammy for consumer confidence.

'Feelgood factor'

So, Fed chairman Alan Greenspan has moved decisively to head off a slide into recession.

By reducing borrowing costs, he has given shares a swift uplift, restoring some of "the feelgood factor" that has been lost since US stockmarkets started to drift south last autumn.

I have just returned from Washington DC, where my overriding impression was that ordinary Americans fail to realise just how precarious their economic plight has become.

For the first time in the country's history, the savings ratio has turned negative - Americans are spending more than they are earning - and Mr Average has been seduced by an explosion in direct-mail credit-card offers.

Meanwhile certain industrial sectors, in particular technology and telecommunications, have suffered a collapse in demand.

Only this week, Cisco, once America's biggest corporation and a new-economy champion, announced that it was laying off 8,500 workers after it had been forced to write off $2.5bn of surplus inventory.

Consumer spending

But it is not just high-tech businesses that have been running into trouble.

On Wednesday, Gillette, a bellwether brand for consumer spending, reported an unexpectedly sharp drop in profits.

Some of its basic product ranges, such as toiletries, have seen year-on-year sales fall by up to 18% - a sure sign that consumers have started to feel the pinch.

It was worrying signals like this that prompted Greenspan to act.

It is too soon to know if he has done enough to drag the US economy, the locomotive of world growth, back on track.

But, given the soaring Dow Jones index, it's clear that American investors are betting he has once again worked his magic.


Terror's impact

Signs of a slowdown

Rate cuts

Analysis

Key players

FULL SPECIAL REPORT
See also:

18 Apr 01 | Business
18 Apr 01 | Business
18 Apr 01 | Business
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