US interest rates look set to fall to 1 per cent or lower next week, with the Federal Reserve Board expected to announce a cut on Wednesday. Cliff Taylor, Economics Editor, reports.
However, analysts are unsure whether the Fed will reduce its key funds rate by 0.25 or 0.5 of a percentage point from its current level of 1.25 per cent.
The US dollar rose yesterday on hopes that the rate cut would boost growth, with investors also encouraged by recent positive data releases.
The euro was trading late yesterday at just over $1.16, compared to almost $1.17 late on Thursday.
Expectations of a US rate cut look set to dominate financial markets next week. Market analysts expect the reduction to be announced next Wednesday, at the conclusion of a meeting of the Federal Open Market Committee, which decides Fed rate policy.
It would be the 13th cut since January 2001, but opinion is divided on its likely size. On Thursday a report in the Washington Post pointing to a half-point cut caught the attention of the market. However, yesterday the Wall Street Journal quoted unnamed Fed officials as saying a quarter-point reduction had not yet been ruled out.
Recent data have painted a reasonably positive picture of the prospects for the US economy. However, even though its key Fed funds rate is already at a 40-year low, the Fed is still expected to cut interest rates again as it attempts to minimise the risk of the economy slipping into a period of deflation.
Mr Alan Greenspan, the Fed chairman, has spoken of the need to have a "firebreak" against the risk of deflation.
In a research note yesterday, Mr Oliver Mangan, economist at AIB Capital Markets, said his view had been that the Fed would cut by 0.25 of a point, with leading indicators for the US economy indicating that it could pick up in the second half of the year.
However, with the Fed becoming increasingly preoccupied with the risk of deflation, he said there were now "grounds for believing" that a 0.5 of a point cut could be on the way, taking US base rates to just 0.75 per cent.
A key goal of US policy is to maintain low longer-term as well as short-term interest rates and it is indicating that its base interest rates will remain low for a prolonged period to help achieve this.
On Wall Street, 10-year interest rates - or bond yields - are around 3.4 per cent, just above a 45-year low reached earlier this week of just over 3 per cent.
Market observers expect little movement among major currencies until after the Fed renders its decision next Wednesday, although Wall Street could provide some direction.
However, a number of influential analysts believe that whatever the short-term moves of the dollar, the currency is now in a long-term downward trend, due largely to the growing US current account balance of payments deficit.
A lower dollar would help to cut the deficit by increasing the competitiveness of US exports. -(Additional reporting, Reuters)
