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Wednesday, 7 November, 2001, 07:13 GMT
US interest rates cut sharply
President George W Bush and Federal Reserve Chairman Alan Greenspan
Bush and Greenspan work to bolster the economy
The US central bank has cut interest rates by half a percentage point to 2%, the lowest rate in 40 years.

Following the cut, the cost of borrowing in the US has fallen sharply below the annual rate of inflation, currently running at 2.6%.

Borrowing of money is therefore, in effect, subsidised.

This, the US authorities hope, should encourage consumers to spend more money and businesses to re-launch investment projects shelved as the economy began to turn down earlier this year.

This was the 10th time the Federal Reserve, under chairman Alan Greenspan, cut rates this year as part of its efforts to boost the flagging US economy.

The Fed's decision to cut was unanimous.

President George W Bush's government has also attempted to boost economic growth by increasing government spending and by pushing a multi-billion dollar tax relief and industry bail-out package through Congress.

Taken for granted

Ahead of the cut, a slew of downbeat economic data had led many observers to predict the Fed's decision.

Last week, official figures showed that the US economy shrank for the first time in eight years during the three months to September, contracting by 0.4% and shedding nearly half a million jobs.

Separate data showed that US consumer spending, which has been credited with keeping recession at bay, posted its sharpest monthly decline in 14 years after the 11 September terrorist attacks.

In a poll carried out by the Reuters news agency, 15 out of 24 analysts predicted a 0.50% cut, while the remainder forecast a 0.25% reduction.

Market moves

On Tuesday, ahead of the cut, the euro fell to $0.89 in anticipation of a hefty rate cut, while the Dow Jones index of leading US shares rose by over 1% on Monday.

Many economists agreed with the Federal Reserve's decision, though some said it would be ineffective in persuading people to keep spending given the prevailing gloom following 11 September and due to the subsequent anthrax attacks.

Others argued that with the cost of borrowing already at near-record lows ahead of the latest cuts, the Fed should have postponed the decision until the full extent of the US downturn was known.

The BBC's Patrick O'Connell in New York
"The size of the cut is at the aggressive end of the scale"
Alex Knutson,
"The Fed has actually surprised me with being more accommodative than before"

Terror's impact

Signs of a slowdown

Rate cuts


Key players

See also:

17 Aug 01 | Business
White House foresees US growth spurt
01 Oct 01 | Business
Attacks 'spoiled US factory revival'
31 Oct 01 | Business
US economy shrinks
01 Nov 01 | Business
No respite for US economy
04 Jan 01 | Business
US fends off global slump
15 May 01 | Business
Fed cuts rates again
02 Oct 01 | Business
Fed cuts rates for ninth time
06 Nov 01 | Business
ECB faces pressure for rate cut
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