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Tuesday, 21 August, 2001, 21:08 GMT 22:08 UK
Fed's rate decision changes little
Tuesday's decision by the Fed cut a key interest rate to 3.5%
The Fed's decision cut a key interest rate to 3.5%
By BBC News Online's North America Business Reporter, David Schepp

As expected, the US central bank, the Federal Reserve, has cut a key interest rate by a quarter point in the hopes of forestalling further slowing of the US economy.

For casual market watchers, however, it would appear the Fed is trying to push a truck uphill. Six previous rate cuts have failed to invigorate the economy as business after business has announced disappointing earnings and warned of layoffs.

Alan Greenspan sees weakness as the greatest threat to the US economy
Alan Greenspan sees weakness as the greatest threat to the US economy
Also, in recent weeks, the slowing has spread overseas to European markets, which were previously thought to be immune to the downturn.

Although keenly awaited, Tuesday's seventh cut in the Federal Funds rate, was not nearly as anticipated as comments by the Fed over the state of the economy.

Cautious comments

In issuing their statement, members of the Federal Open Markets Committee (FOMC), who were responsible for Tuesday's decision, continued to express concern over continued weakness in the US economy, which they believe remains the dominant threat.

"Household demand has been sustained, but business profits and capital spending continue to weaken and growth abroad is slowing, weighing on the U.S. economy,'' the Fed said.

"The associated easing of pressures on labour and product markets is expected to keep inflation contained."

Chart showing declines in major US stock indexes in 2001
Dropping stocks prices have caused investor apathy
Analysts said the Fed's statement was not quite as negative as the one that accompanied the prior rate cut in June. But it was still somewhat downbeat.

"We believe it is possible that there will be another Fed easing at the next FOMC meeting on 2 October, said Merrill Lynch analyst Bruce Steinberg.

"It retained its easing bias, which leaves the Fed open to further easing in the future if need be," he said.

Consumer spending

The rate reductions have been driven in part by a belief that consumer spending can continue to buoy the economy as American business regroups.

While consumer sentiment is no longer at historic highs, Americans have showed little signs of slowing their consumption of goods.

But just as a slowing economy has failed to curtail spending, dropping interest rates are not expected to cause Americans to embark on a spending spree.

Part of the reason is that mortgages are very near historic lows - right around 7% - and analysts see little reason for them to drop further.

Cheap loans

Interest rates for 30-year fixed-rate mortgages, the standard in the States, have moved little despite the cuts by the Fed. Mortgage rates hover only slightly lower than where they were at the beginning of the year.

By contrast, the Federal Funds rate was 3 full percentage points higher, at 6.5%, at 1 January, days before the Fed ushered in its first rate cut.

High demand for mortgages and mixed economic news have colluded to keep mortgage rates low.

More cars, less savings

Detroit, meanwhile, has for months been offering low-interest-rate deals on car loans as a way of moving stagnant inventories of vehicles off of dealers lots. Consumers have reacted enthusiastically.

Only recently has demand for new cars dropped off as news of a slowing economy and massive layoffs filter through to consumers.

The sour stock market, too, has kept some consumers spending, as few see little reason to invest in what is viewed as a market headed downward.

A reduction in interest rates also means a slight reduction in the amount of interest paid on savings accounts.

The rate of interest paid on money-market savings accounts, which usually require high balances than standard "passbook" savings accounts, in US banks averaged 3%, according to Bankrate.com, a web site that monitors interest rates.


Terror's impact

Signs of a slowdown

Rate cuts

Analysis

Key players

FULL SPECIAL REPORT
See also:

17 Aug 01 | Business
26 Jun 01 | Business
14 Aug 01 | Business
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