Dow jumps ahead of Fed meeting

Hopes that the Federal Reserve will announce deep cuts in US interest rates tonight to revive the American economy helped shares rebound on Wall Street in early trading yesterday.

Following last week's relentless fall in share prices, dealers were hoping that the Fed's open market committee would follow the lead of the Bank of Japan, which yesterday announced that it would let interest rates fall to zero in a bid to haul the country out of its deflationary spiral.

Wall Street has already factored in a cut of 50 basis points from the Fed, with some analysts expecting a reduction of 75 basis points following the confidence-sapping falls in both the Dow Jones industrial average and the hi-tech Nasdaq index last week. The Dow Jones Industrial Average had added around 150 points by late afternoon in New York, al though the FTSE 100 index edged lower in the day.

US treasury Secretary Paul O'Neill said that he saw no value in commenting on fluctuating stock prices on a daily basis. "The markets go up and the markets go down. If you've been watching them as long as I have, you know that," Mr O'Neill said in response to a question whether he was practising a policy of benign neglect toward recent big losses in the market.

In Tokyo, the small fall in the Nikkei Dow index occurred before the Bank of Japan announced that it would allow interest rates to fall to zero and then keep them there until prices had stopped falling. Under intense political and international pressure, the policy board of the central bank agreed during an eight-hour meeting to take steps towards the establishment of Japan's first inflation target, expanded purchases of government bonds and return to the money-for-nothing policy that it abandoned last August.

The measures - radical by the bank's conservative standards - create monetary tools that could allow Japan's financial authorities to actively promote inflation to offset a vicious cycle of falling prices, declining profits and stagnant consumption. Masamu Hayami, the bank's governor, said the policy shift reflected the darkening of the economic outlook in recent months.

"Japan's economy has failed to return to a path of sustainable growth and is once more faced with the threat of deterioration," he said.

"These measures show the central bank's determination to prevent a continuous decline of prices."

Since it raised interest rates from zero last August, the central bank has been used as a political punchbag by the ruling Liberal Democratic party, which blames Mr Hayami for renewed fears of a financial crisis, record unemployment and worrying signs of a deflationary spiral.

The governor was defiant yesterday, however, saying that the recent decline of the economy was the result of external factors - the slowdown in the United States, which is Japan's biggest export market - and the government's failure to implement reforms.

Under the new policy, the central bank will switch its main target in the money markets from the overnight call rate - which determines the premium for interbank borrowing - to its current account for bank reserves.