Citing concerns about falling business spending and deteriorating economic conditions worldwide, the US Federal Reserve yesterday cut the short-term inter-bank lending rate by a quarter of a point, the sixth interest rate reduction in the US in as many months.
The widely anticipated reduction represents an easing of the Fed's aggressive rate-cutting programme, begun in January, which has brought inter-bank lending rates down to 3.75 per cent, from 6.5 per cent. The five previous cuts were of half a point each. The US central bank hinted at a further rate cut to stimulate the US economy this summer, repeating its warning of earlier announcements that "the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future".
The move, which brought US interest rates to their lowest point since 1994, was announced at the end of a two-day meeting of the Fed's chief policy-making group, the Federal Open Market Committee, under Fed chairman Mr Alan Greenspan. "The patterns evident in recent months - declining profitability and business capital spending, weak expansion of consumption, and slowing growth abroad - continue to weigh on the economy," the Fed said in a statement. The Federal Reserve gave no reasons for easing the rate of reduction in interest rates, but said it noted favourable trends bolstering "long-term prospects for productivity growth and the economy".
Fed officials have been expressing concern that the most aggressive credit-easing campaign since the 1980s could lead to an overheated economy next year with higher inflation. However, it said yesterday that inflation was not currently a risk as it had been contained by the "easing of pressure on labour and product markets".
The Fed made its decision against a background of mixed economic reports. Among these was a rise in the consumer confidence index to its highest level this year and an increase in new home sales in May of 0.8 per cent, the third in four months. Durable goods orders also rose 2.9 per cent in May, recovering from a 5.5 per cent slump in April.
Analysts are divided on whether this will be the last rate cut in the current series. Ms Lynn Reaser, chief economist at Bank of America Capital Management, said: "The economy should in fact start to show signs of stabilising during the next two months as the interest rate cuts and tax cuts take hold." But economist Mr Clifford Waldman of Waldman Associates, citing economic turmoil overseas, said: `Problems remain. I don't think it will be the last one."
In Ireland, Dr Dan McLaughlin, chief economist with Bank of Ireland, said a quarter point drop had already been priced into the market.
Mr Jim O'Leary, economist at Davy Stockbrokers, said the 25 basis point cut left the Federal Reserve room to manoeuvre. "You must remember it has already cut 250 basis points since January and only part of that easing has yet been felt."
The Fed cut means a further easing in interest charged by US commercial banks, which have lowered their prime lending rate, the benchmark for millions of consumer and business loans, from 9.5 per cent down to a seven-year low of 7 per cent, since the first Fed rate cut in January. Commercial banks, led by Bank of America and Bank One, last night began cutting their prime lending rates, from 7 to 6.75 per cent, also the lowest since 1994.
Federal Reserve interest-rate cuts usually take between six and nine months to make their way through the economy. Tax-cut refund checks of up to $600 per family are expected to begin arriving next month and analysts predict this will also stimulate economic growth in the short term.
Some economists believe economic growth in the current quarter may have slowed to an anaemic annual rate of 0.5 per cent, down from the 1.3 per cent rate in the first three months of the year.
