The US Federal Reserve cut interest rates by a half percentage point yesterday, the fifth cut this year in an aggressive policy aimed at getting the US economy back on a growth track. The Fed said the rate cut was necessary as the risks to the US economy "are weighted towards conditions that may generate economic weakness in the foreseeable future".
The 50 basis points cut in the federal fund rate had been widely anticipated and markets remained sluggish with the Dow Jones falling 10.93 to 10,866.4 and the Nasdaq Composite up just 4.01 points to 2,085.93.
The dollar rose slightly against the euro and yen.
Four earlier cuts of 50 basis points each had failed to lift the US manufacturing sector out of recession. The US unemployment rate had climbed to 4.5 per cent in April, threatening a sharp drop in spending which could tip the entire economy into recession, and production had declined for the seventh straight month.
"The erosion in current and prospective profitability, in combination with considerable uncertainty about the business outlook, seems likely to hold down capital spending going forward," the Fed stated in its statement issued at 7.15 p.m. Irish time.
"This potential restraint, together with the possible effects of earlier reductions in equity wealth on consumption and the risk of slower growth abroad, continues to weigh on the economy."
The policy-making Federal open market committee, presided over by Federal Reserve chairman Alan Greenspan, found some positive indicators in the US economy however. It noted that "a significant reduction in excess inventories seems well advanced". Consumption and housing expenditures had also "held up reasonably well", though activity in these areas had "flattened".
The US central bank sees the risk of inflation as less than that of slow growth. "With pressure on labour and product markets easing, inflation is expected to remain contained," it said.
This may be the last in the series of rapid cuts which have brought the key short term bank lending rate down from 6.5 per cent to 4 per cent in just over four months, analysts said. Unlike previous occasions there was no mention of continuing to monitor economic conditions, a key phrase used before to indicate that further easing could be expected.
Immediately after the Fed's action was announced, Bank of America, Bank One and M&T Bank reduced their prime lending rates by a half-point, to 7 per cent. Other banks were expected to follow. The prime rate is the key benchmark for millions of loans, from home equity and unpaid credit card balances to short-term loans for small businesses.
The Fed also cut its mostly symbolic discount rate, the interest that it charges to make direct loans to banks, by one half point to 3.5 per cent. It will hold its next scheduled meeting on June 26th-27th.
The rate cut reflects the US central bank's concern that consumer spending, the main force keeping the economy afloat, could fall, especially with unemployment rising. Cheaper interest rates make it easier for consumers and businesses to borrow and invest, both of which bolster economic growth.
The economy grew at an annual rate of 2 per cent in the first three months of this year, twice as fast as the 1 per cent growth rate registered in the fourth quarter. But many economists believe the economy has lost altitude in the current quarter.
The central bank last cut rates on April 18th, after an emergency telephone conference call convened by Mr Greenspan.
