The US Federal Reserve Board has continued its policy of reducing interest rates in an attempt to support faltering economic growth. Some investors and analysts were disappointed that its latest reduction - announced yesterday evening - was just 0.5 of a percentage point, when many had forecast a more aggressive 0.75 point cut. However, the Fed has now cut rates three times this year, reducing borrowing costs by 1.5 percentage points in total, which is a significant policy response to the signs of weakness in the US economy.
Will it be enough to support economic growth in the US? The honest answer is that nobody is quite sure. The speed of the US economic downturn has caught most observers by surprise. Growth has slowed from an annual rate of 8.3 per cent in the final quarter of 1999 to 1.1 per cent in the same period last year. As a result, business and consumer confidence has taken a severe jolt and will not quickly recover.
By making it cheaper to borrow money, the Fed will hope to revive retail spending and investment. What is difficult to know now is how effective lower rates will be in achieving this. The worry is that both consumers and business - having borrowed heavily in recent years - are now entering a period of retrenchment from which they may take some time to emerge. Only time will tell how long this period of adjustment will be.
But it is too early yet to predict a prolonged US recession. The Fed has certainly responded quickly and appropriately and lower borrowing costs should support growth. Importantly, the Fed made it clear yesterday that it is ready to cut interest rates again if the economic signals remain poor. "Excessive weakness" remains the main threat to the US economy, according to a statement issued after the Fed meeting, which said that it will "need to monitor developments closely." Another interest rate cut may thus not be long delayed.
Of course, the Fed has no magic wand with which to revive the economy. Its chairman, Mr Alan Greenspan, has been widely credited with guiding the economy through its longest ever period of expansion, judiciously raising and lowering interest rates as economic conditions demanded.
However, interest rate changes take time to feed through to economic activity. It will be some months, for example, before lower interest rates benefit company profits, or make a significant difference to the budget of US households. Lower rates are thus unlikely to lead to a rapid revival in the US stock market, where investors will wait for solid signals of reviving growth and profitability.
The Irish economy is heavily reliant on what happens in the US. Already, we have started to see the impact of the US slowdown - most recently in the decision of Intel to delay the building of its new chip manufacturing plant in Leixlip, County Kildare. It is thus important for our economy that the US manages to avoid a nasty recession. Unfortunately, despite the Fed's efforts, it is too early to say that this will be the case.