The US Federal Reserve meets today amid widespread expectations it will cut interest rates by half a percentage point for the fifth time this year to prevent the US economy slipping further towards recession. Some analysts cautioned, however, that the Fed might reduce rates by only a quarter per cent because of recent signs of recovery.
The latest positive news came yesterday in a US Commerce Department report showing that stockpiles in American businesses fell in March for the second month in a row, indicating that manufacturing may pick up again soon. Inventories declined 0.3 per cent to $1.213 trillion (€1.39 trillion) in March after a 0.4 per cent drop in February - the first back-to-back monthly reduction since January and February of 1992.
However, Fed chairman Mr Alan Greenspan is likely to be strongly influenced by another report yesterday showing that the longest spell of monthly declines in American industrial production since 1982 continued in April. Overall industrial output fell 0.3 per cent, the seventh straight month that output at the nation's factories, mines and utilities has fallen. The percentage of manufacturing capacity in use also fell to its lowest point since 1991.
Evidence of a slowdown in domestic demand in the United States gives Mr Greenspan room to cut aggressively, as it helps keeps inflation - a growing danger - in check. The Fed began raising rates in mid-1999 specifically to slow demand growth. Growth in domestic demand faltered in the first quarter, falling to 3 per cent annually from an average 5 per cent in the past five years.
Translated into a fall in imports, which comprise 35-40 per cent of all American domestic spending for goods, this means the burden is falling disproportionately on foreign producers, and underlines how the US slowdown is having an adverse effect on other world economies.
Demand for foreign goods and services plunged 30 per cent per year in the first quarter, while demand for domestic products actually rose 4.5 per cent annually, providing what Mr Jim Glassman, senior US economist at JP Morgan in New York, described as a "shock absorber" for the US economy.
The Federal Reserve policy setting Open Market Committee meeting in Washington today will ease the funds target rate by 50-basis-points today, taking the overnight bank lending rate from 4.5 to 4.0 per cent, Mr Glassman said. "The Fed probably has one more easing in store, at its regular policy meeting on June 26th and 27th."
Brown Brothers Harriman senior economist Lara Rhame said: "There is a limit to where the Fed can go and I think we're close to that."
Wall Street trading was sluggish yesterday as investors pondered whether the Fed considered the economy strong enough to ease its aggressive rate-cutting policy, amid concerns that corporate earnings would not show real improvement before winter.
Factories have cut more than 370,000 jobs this year, triple the loss of 120,000 factory jobs in the fourth quarter, according to Bloomberg News statistics. Those reductions helped send the unemployment rate to 4.5 per cent in April, the highest in 2-1/2 years, from 4.3 per cent during March.
