The US Federal Reserve yesterday cut short-term interest rates for the 10th time this year, citing concerns about a deterioration in business conditions in the US and around the world.
Warning that the risks to the US economy "are weighted mainly toward conditions that may generate economic weakness", the Federal Reserve policy-making Open Market Committee cut the federal funds rate from 2.5 to 2.0 per cent, the lowest point since the Kennedy era.
The cut was the 10th since January, when the lending rate stood at 6.5 per cent, and the third half-point cut since the September 11th attacks on the United States. It brought a rally on Wall Street where the Dow gained 150 points within an hour of the Fed announcement at 2.20 p.m.
The reference to a deterioration in economic conditions outside the US underlined the Fed's growing concerns that the US downturn is leading to a global recession.
The Fed said it concluded that "heightened uncertainty and concerns about a deterioration in business conditions both here and abroad are damping economic activity." It added, however, that "the long-term prospects for productivity growth and the economy remain favourable and should become evident once the unusual forces restraining demand abate".
Last month consumer confidence in the United States dropped to its lowest point in over seven years, the unemployment rate leapt from 4.9 per cent to 5.4 per cent, and manufacturing fell to its lowest level since 1991, the last time the US was in recession. The US economy contracted by 0.4 per cent in the third quarter, heralding what most analysts believe is the start of a recession.
US consumers, who drive two-thirds of the world's biggest economy, cut back on spending in September by the largest amount in nearly 15 years. The Fed's Mr Alan Greenspan has frequently said consumer and business confidence are the key to growth.
The Fed discarded concerns that a further cut might induce inflation. Some analysts warned that when a $100 billion proposed economic stimulus package is agreed by the US Congress it could have an inflationary effect.
The Senate majority leader, Mr Tom Daschle, said after a meeting of congressional leaders with President George W. Bush yesterday that he hoped the stimulus "will trigger the economy by the end of the year".
US interest rates are now well below the annual inflation rate of 2.6 per cent, allowing a continued aggressive attempt by the Fed to stimulate the economy through rate cuts, although the previous nine have failed to prevent the end of the longest period of growth in US history.