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Tuesday, 21 August, 2001, 11:12 GMT 12:12 UK
Can US rates go lower?
Federal Reserve chairman Alan Greenspan
With interest rates in the US at seven-year lows, some are wondering how much lower they can go? Chances are Americans have not seen the last of interest-rate cuts, as BBC News Online's David Schepp in New York explains.

In cutting interest rates for a sixth time this year, the US central bank signalled that it remains concerned about the sluggish American economy.


Until the Fed really sees evidence that things are turning around, they will be predisposed to ease

Robert Dederick
Northern Trust

In five of its rate cuts this year, the Federal Reserve sliced the key interest rate by a half percent, moving quickly and decisively in the hopes of forestalling a recession. The latest cut in June was by a quarter of a percent, bringing rates down by a cumulative 2.75% this year.

"They've done five 50 basis-points rate cuts in a period of under five months," said Brian Finnerty, market strategist for CE Unterberg Towbin in New York.

"That's the most aggressive they've ever been. So they must know this economy [was] in bad shape at least in terms of corporate profits and capital expenditures, which have been shut off to nothing," Mr Finnerty told the BBC.

While US business has begun to whittle away at bloated stocks of goods, it still remains guarded about where the economy is heading and, in the meantime, is holding off on big investments in new equipment and buildings.

How much lower can interest rates go?

The US benchmark lending rate now stands at 3.75%, substantially below the 6.5% level where it began the year.

It is widely believed the Fed will issue another cut of a quarter point this month, taking the Federal Funds rate to the lowest it has been since February 1994, when it stood at 3.25%.

"Until the Fed really sees evidence that things are turning around, they will be predisposed to ease," says Robert Dederick, economic consultant to Northern Trust in Chicago.

Excessive weakness

Fuelling the Fed rate cuts are fears of excessive weakness in the economy.

"The economy has plenty to be worried about, given the capital-spending slowdown and given the... unemployment rate," said Larry Wachtel, Prudential Securities analyst.

Compounding the Fed's concern was a report in May that showed the nation's unemployment rate leapt to 4.5%, the highest level in nearly two years. The latest data from July indicates that unemployment has remained steady at this level.

But the Fed also remains concerned about the faltering stock market and noted that many Americans have lost substantial sums due to the drop in technology stocks

That loss of wealth, the Fed said, continues to weigh on the economy.

Growth concerns

In its June statement, the Fed said "the associated easing of pressures on labour and product markets are expected to keep inflation contained".

But at the same time, economic growth eased to just 0.7% annually in the April-June quarter, the poorest performance in eight years, according to the closely watched Fed survey, known as the "beige book".

The gloomy news makes it even more likely that the Fed will opt to cut rates again.

"Manufacturing activity in nearly all sectors and regions declined further in recent months as producers adjusted to weak domestic and foreign demand and worked through accumulated inventories," it said.

Spreading

It also pointed out that the problem is not confined to manufacturing.

"Sustained weakness in the manufacturing sector spilled over to other businesses, with many districts indicating declines in demand for office space and trucking and shipping services."

Retail sales were "sluggish and frequently below expectations".

This is especially grim news for the US economy, since a relatively buoyant consumer market was seen as the main factor keeping the country out of recession.


Terror's impact

Signs of a slowdown

Rate cuts

Analysis

Key players

FULL SPECIAL REPORT
See also:

15 May 01 | Business
Fed cuts rates again
15 May 01 | Business
Will US mortgages fall?
18 Apr 01 | Business
US interest rates cut
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