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The BBC's Patrick O'Connell in New York
"The economic argument is very finely balanced after this move"
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Ross Greenwood, Shares Magazine
"Consumer demand is rising and falling interest rates helps this"
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Federal Reserve Governor, Lyle Gramley
"The Fed wanted to be careful"
 real 28k

Wednesday, 27 June, 2001, 19:43 GMT 20:43 UK
Fed opts for 'smaller' rate cut
Alan Greenspan of the Federal Reserve
The Fed changes tack with a 0.25% cut to rates
The US central bank, the Federal Reserve, has cut US interest rates by a quarter of a percentage point to 3.75%.

The Fed blamed "declining profitability and business capital spending, weak expansion of consumption and slowing growth abroad" for its decision to cut rates for the sixth time this year.

The risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future

Fed statement
However, Wednesday's cut is considered modest compared with the five previous cuts of 0.5% implemented by the Fed earlier this year.

Economists had widely predicted a loosening of rates, but were pretty much split on whether the Fed would opt for half a percentage point, or a quarter.

Some analysts have approved the smaller cut, arguing it will send an effective message to the markets that the Fed is confident of economic recovery.

Market reaction

US stocks fell immediately following the Fed's statement, after moving higher in cautious trading ahead of the decision.

The Dow Jones industrial average fell about 40 points within 30 minutes of the announcement, while the tech-heavy Nasdaq Composite index fell nearly 15 points.

Analysts said the markets dropped because investors had been hoping for a larger cut of half a percentage point.

Later both indices moved back into positive territory.

Six interest rate cuts for the US economy this year
"It's interesting that (the Fed) slowed the pace down," said Josh Stiles, senior bond analyst at in New York.

"That tells you the Fed is growing confident that a rebound will be coming toward the end of the year, and that they have to start worrying about overdoing it."

Economic weakness

In a brief written statement, the Fed said it is still concerned that "the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future".

Some Fed officials are said to be privately concerned that the US won't experience a rebound until early next year.

The Fed also seems keen to keep a lid on inflation with its decision to ease up on aggressive cuts.

Determined to show that inflation is under control, it said on Wednesday that "the associated easing of pressures on labour and product markets are expected to keep inflation contained".


The Fed was also careful to make some positive noises about the US economy in its statement on Wednesday.

It stressed that "continuing favourable trends bolster long-term prospects for productivity growth and the economy".

The dilemma for the Fed is that while consumer confidence is relatively buoyant, the US corporate sector is showing few signs of revival.

Reports on Tuesday said consumer confidence jumped in June and sales of new homes kept climbing in May, a sign consumers have not given up the ghost on spending.

The quarter-point cut will also buy the Fed time while it assesses whether its previous moves have been effective.

The impact of interest-rate reductions usually takes about six months to filter through into the economy.

Larry Wachtel of Prudential Securities told BBC News 24 that "time is the key word here".

He added: "The rate cuts will start to impact the economy in the second half but you can't be precise."

Profit warnings

The six reductions since January represent the highest number of consecutive cuts that Fed Chairman Alan Greenspan has made in his 14-year tenure.

But despite the rapid-fire cuts, there has been talk that the US could already be in recession.

The National Bureau of Economic Research (NBER) - a private research organisation - said earlier this week that factors such as rising unemployment and slumping industrial production indicated the economy may have slipped into decline.

Also, in the last two weeks investors have been hit by a slew of corporate profit warnings, culminating in downgraded forecasts from Merck, America's biggest pharmaceutical company, and the investment bank Merrill Lynch.

According to First Call, 140 companies in the broader Standard & Poor's market index - or 67% - issued negative pre-announcements for the June quarter.

Manufacturing gloom

The latest batch of economic data has also left economists unconvinced that the US is out of the woods.

Earlier this month the Fed said that US factories, mines and utilities were operating at 77.4% capacity in May, the lowest rate since August 1983.

Similarly, in last week's reports the number of new claims for unemployment benefits were at their highest level since 1992, suggesting that there was still weakness in the job market.

The Fed's decision came after closed-door two-day meeting of the Federal Open Market Committee.

The panel is composed of Mr Greenspan, Fed governors and presidents of five of the 12 Federal Reserve banks.

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27 Jun 01 | Business
Fed set for fresh rate cut
26 Jun 01 | Business
US consumers remain upbeat
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What next for the Fed?
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US may already be in recession
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Greenspan warns against bank caution
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Data underscore US slowdown
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Strong dollar policy
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Danger ahead warns Greenspan
05 Jun 01 | Business
Sharp drop in US productivity
01 Jun 01 | Business
Mixed picture of US economy
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