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Wednesday, 12 December, 2001, 00:50 GMT
US interest rates cut again
US interest rates graphic
The US Federal Reserve has cut interest rates by a quarter of a percentage point to 1.75%.

It is the 11th cut the Fed has made this year, in its efforts to revive the flagging US economy.

"Economic activity remains soft, with underlying inflation likely to edge lower from relatively modest levels," the Fed said in is statement.

It added that while there were some signs of recovery in the economy, these were "preliminary and tentative."

The Fed also cut its more symbolic discount rate by a quarter percentage point to 1.25%.

Reaction

The quarter point cut had been widely expected and some analysts now think further cuts are now unlikely in the short-term.

"I'm in the camp that says we're done, even though the Fed had a recession bias in their statement," said Corey Redfield a strategist at Piper Jaffray.

"I'm looking for the recovery to start in the first quarter of 2002. I think federal funds will stay here past the middle of next year."

Investors reacted by briefly pushing the leading Dow share index back above the 10,000 level.

But the rally was halted following a gloomy trading statement from the pharmaceutical company Merck, and by the close of trade the Dow ended down 33 points at 9,888.37.

"The statement by the Fed had the market a bit confused. It looks like things are getting better, but they're hedging their bets," said Edgar Peters, chief investment officer at PanAgora Asset Management.

"It looks like they are leaning toward either another small cut or not doing anything."

Recession

Last month the National Bureau of Economic Research, a panel of senior economists, declared that the US had entered recession in March this year.

The move marked the end of the longest sustained period of growth in the history of the US economy.

The Fed has tried to counter the slowdown by cutting interest rates to their lowest levels for 40 years.

Eight of the previous 10 rate cuts the Fed has made this year have been by half a percentage point.

But analysts say a smaller move should now be sufficient given that the federal funds rate has fallen so low.

"A quarter-percentage point cut when the fed funds rate was at 6.5% (as it was at the end of 2000) is relatively small, but a quarter-point cut when it's down to 2% can have quite a significant impact," said Gary Thayer, an economist at AG Edwards & Sons, before the Fed's latest cut was announced.

Mixed signals

Recent data on the US economy has been mixed.

Retail sales appeared to be recovering after its post-11 September slump, but two reports released on Tuesday sales at stores fell last week.

Last week the latest set of jobless figures showed the unemployment rate hit a six-year high in November - jumping to 5.7% from 5.4%.

And analysts fear confidence amongst consumers - which seemed to have been holding up quite well - will start to slip if unemployment continues to rise.

A report on Tuesday from the National Association of Purchasing Management (NAPM) said its members saw the US economy growing next year, but said job prospects remained bleak.

"Economic growth in the United States will resume in 2002," the NAPM report said.

But it said manufacturers were "less than bullish" about the prospects for early 2002, and employment was expected to fall by 0.5% over the next 12 months.

 WATCH/LISTEN
 ON THIS STORY
ING Barings Michael Hughes
"With low interest rates, you hopefully will kickstart that confidence"
The BBC's Stephen Evans
"Some had expected the Fed to change towards a more neutral view on recession versus growth"
Publisher Steve Forbes of Forbes magazine
"They should make the rate cuts effective now"

Terror's impact

Signs of a slowdown

Rate cuts

Analysis

Key players

FULL SPECIAL REPORT
See also:

11 Dec 01 | Business
US recession may already be over
07 Dec 01 | Business
US jobless at six-year high
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
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