US interest rates slashed to 1%


Richard Moore

US interest rates slashed to 1%

The Federal Reserve has cut its key interest rate from 1.5% to 1% in a widely expected move, as it aims to avoid a possible US recession.

Earlier this month the Fed cut rates from 2% to 1.5% in an emergency move, which was co-ordinated with five other central banks.

But the move did not boost US markets, with the Dow and S&P 500 closing down.

Interest rates have been slashed since September 2007, when the federal funds rate stood at 5.25%.

The 1% level – last seen between June 2003 and June 2004 – did not have a major effect on shares, as traders had already factored in the widely expected cut.

At close of trade in Wall Street, the Dow Jones was down 0.82%, or 74.16 points, at 8990.96. The S&P 500 was down 1.11%, or 10.42 points, at 930.09 and the Nasdaq was ahead 0.47%, or 7.74 points, at 1657.21.

Separately, the Federal Reserve boosted Asian markets with the news that it is providing $30bn of funding to South Korea, Singapore, Brazil and Mexico.

“With this deal, Korea secured a ‘safe dollar supplier’ in the Fed and that will ease concerns over a dollar liquidity shortage,” said June Park, an economist at Woori Investment & Securities.

The news reversed a slump in Korean shares, which closed up 12%, and also sent Singapore’s markets up nearly 7% by the end of the morning.

‘Moderate economic growth’

The rate cut move is confirmation that inflation is no longer seen as the major threat to the US economy.

Some analysts in fact fear that deflation could be a risk to the economy, as consumers delay any spending they can in the hope that products will be cheaper in the future.

But the Fed hopes its action will help get credit flowing and “should help over time to improve credit conditions and promote a return to moderate economic growth”.

Cutting rates to such a low level however means the central bank is running out of interest rates that it can use as a tool to stimulus in the future.

‘Restraint on spending’

“The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures,” said the Federal Open Market Committee headed by Ben Bernanke after the unanimous decision.

“Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for US exports. “

The committee went on to say that an “intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit”.

Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, Ohio, said the cut was consistent with indications from the Fed.

“In terms of the rate cut they met expectations pretty much down the line,” he said.

“They indicated some concerns with the marked weakening of the economy and consumer spending.”

The move follows the latest set of data on factory goods orders from the Commerce Department.

Orders for long-lasting items manufactured in US factories were unexpectedly strong in September, rising 0.8%, following the 5.5% fall in August.

Demand for commercial aircraft grew 29.7% while orders for motor vehicles rose 3%.

Excluding transportation, orders were down 1.1% in September
Story from BBC NEWS:
Published: 2008/10/30 08:52:44 GMT