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Tuesday, 13 August, 2002, 21:05 GMT 22:05 UK
US interest rates kept on hold
US economy graphic
The US central bank has again left interest rates on hold, despite growing fears of economic weakness.

The Federal Reserve has retained rates at 1.75%, the lowest since July 1961.

But the Fed said that economic weakness, rather than rising inflation, was now its greatest concern.

"The risks are weighted mainly toward conditions that may generate economic weakness," the Fed said.

The bank blamed falling share values and concerns over accounting scams for delaying the US's revival this year.

Investor reaction

The statement also left the door open for future rate cuts in an effort to stimulate the economy.

"If the economic statistics continue to come in on the weak side I would think we would see an easing in September," said Mary Ann Hurley, vice-president of fixed income trading at DA Davidson in Seattle.

But the prospect of lower rates failed to perk up US shares.

The Dow Jones Industrial Average, which had stood seven points lower before the Fed announcement, fell a further 80 points in the following minutes, and closed down 206 points.

The decision to keep rates on hold was backed by all members of the Fed's rate setting committee.

Retail factor

The US economy is taking longer than many economists had expected to recover from last year's recession.

"If you look at the economic data... it is largely consistent with warnings the Fed has been providing the market this year, that the recovery may be modest by historical standards," Steve Mayon, economist at Scotia Capital Markets, said.

US President George W Bush held a summit on Tuesday with about 240 Americans, ranging from company bosses to a rubbish collector, to discuss the challenges facing the US economy.

"We see problems, but we're confident in the long-term health of this economy," he said, promising to maintain the drive to clean up corporate America.

Mixed messages

US economic growth in the April to June period was at 1.1%, considerably lower than the 5% achieved in the quarter before.

Investment by business has proved lacklustre, while only 6,000 jobs were created in July, raising fears that employment concerns might cause consumers to restrain the high spending which has been credited with saving the US economy from a severe downturn.

While falling share values have worsened these fears, data for July showed retail spending up by a buoyant 1.1% over June.

"Stock prices come and stock prices go but consumer spending just keeps on keeping on," said Joel Naroff, of Naroff Economic Advisers in Holland, Pennsylvania.

 WATCH/LISTEN
 ON THIS STORY
The BBC's Andrew Walker
"The Fed's main concern was weak demand for goods and services"

Economic indicators

Fears and hopes

US Fed decisons

IN DEPTH
See also:

13 Aug 02 | Business
05 Aug 02 | Business
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