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Tuesday, 2 October, 2001, 18:18 GMT 19:18 UK
Fed cuts rates for ninth time
US rate cuts since July 2001
The US central bank, the Federal Reserve, has cut interest rate for the ninth time this year, by half a percentage point to 2.5%.

If inflation is factored in, borrowing cash is now virtually free, even subsidised by the Federal Reserve.

The Fed's move is designed to stave off a recession, with manufacturing hit by the global economic slowdown and consumer confidence undermined following the terrorist attacks in New York and Washington three weeks ago.

The economic picture
University of Michigan consumer confidence index: 81.8 (Sep) vs 91.5 (Aug)
Unemployment: 4.9% (4-year high)
Manufacturing: September was 14th straight contraction
Inflation: consumer prices up 0.1% in August
Growth: 0.3% (Q2) vs 1.3% (Q1)
"The terrorist attacks have significantly heightened uncertainty in an economy that was already weak", the Fed said in a statement, but added that "the long-term prospects for productivity growth and the economy remain favorable".

The US government, meanwhile, hopes to give additional support to the economy. President George W Bush said the US needed a "stimulus package big enough to get the economy moving in the short run, but small enough so that it doesn't affect long-term interest rates".

Under discussion is a government spending package that could amount to as much as $100bn.

The federal funds rate - key interest rate in the US - is now down to its lowest level since 1962.

And many observers are sure that there is still room for more cuts down the line.

Analysts at SG Securities, Morgan Stanley and HSBC Securities all predict that rates could fall as low as 2% by the end of the year.

Spending sinks

The Fed's main purpose, said Wells Fargo chief economist Sung Won Sohn, "is really to boost confidence".


We were on the brink of recession even before this happened, and there's no escaping it now... We're going to almost certainly get three quarters of negative growth

David Jones, economist at Aubrey G Lanston

Consumer confidence is the big fear, since it is retail spending that has kept the US economy moving this year.

Yet the respected University of Michigan confidence survey released on 28 September saw sentiment slump to its lowest level in eight years.

With unemployment already at a four-year high of 4.9% in August, the layoffs in aviation, technology and other sectors are believed to hit spending hard.

The ongoing contraction of manufacturing industry and low inflation are seen as further arguments for a fresh cut.

Bill Sullivan of investment bank Morgan Stanley said rates of 2.5% might "need not be the bottom in this [rate cut] cycle."

Are we there yet?

Above all, recession - technically defined as two full quarters of contraction in gross domestic product (GDP) - now looks more likely.

The US economy managed to expand by barely 0.3% in the April-June quarter, after growing 1.3% in the first three months of the year.

And many economists now fear that is the last growth for some time to come.

"We were on the brink of recession even before this happened," said David Jones, economist at Aubrey G Lanston in New York, "and there's no escaping it now."

Starting with the third quarter, he added, "We're going to almost certainly get three quarters of negative growth."

Will it work?

The problem is exacerbated by the fact that Europe and Japan are also slowing, in the first concerted downturn since the oil shocks of the 1970s.

"Growth in the second half of this year will be negative in the US - the sign of recession - and very low in the European Union," said Ignazio Visco of the Organisation for Economic Co-operation and Development.

"There will be global stagnation during this period."

In the US, tax cuts are one option, although Fed chief Alan Greenspan is thought to be sceptical about whether further cuts - on top of the package seen earlier this year - would do any good.

More help for the newly unemployed is another possibility.

And more concerted action, along the lines of the joint interest rate cuts seen within 10 days of 11 September, is probable as well.

 WATCH/LISTEN
 ON THIS STORY
The BBC's Mishal Hussian
"It is in line with what the Federal Reserve did two weeks ago"
David Huether, National Assoc. of Manufacturers (US)
"We really could not have expected anything more at this point"
See also:

02 Oct 01 | Business
Analysis: The Fed's next move
01 Oct 01 | Business
Attacks 'spoiled US factory revival'
27 Sep 01 | Business
US joblessness at nine year high
21 Sep 01 | Business
US slump could be 'steep but short'
20 Sep 01 | Business
Greenspan assesses the damage
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