Fed cuts US interest rates

The US Federal Reserve today cut interest rates to their lowest levels for 40 years in an attempt to keep the world's largest economy from slipping back into recession.

In a move that smacked of desperation, America's central bank trimmed rates by 0.5% to 1.25% to inject some momentum into an economy stuck in second gear.

The Fed's policy-making body, the federal open market committee, lowered the cost of borrowing for the first time this year amid signs that the US economy is having trouble maintaining growth after four quarters of expansion. The Fed cut rates 11 times last year to yank the economy out of recession.

Economic growth has been sustained by the willingness of consumers to spend and buoyant house prices, in a mirror image of the UK economy. But consumer spending - which accounts for two-thirds of US economic activity - is showing signs of flagging.

In a widely-watched indicator of consumer intentions, the consumer confidence index from the Conference Board, a research group, slumped in October to a nine-year low - 79.4 from 93.7 in September.

Consumer confidence is likely to be dented by the worsening jobs situation. Figures from the labour department last Friday showed a loss of 5,000 jobs in October, a second monthly decline in job totals.

This week the recruitment agency, Challenger, Gray and Christmas said the number of planned job cuts announced by US companies shot up to 176,010 last month.

Meanwhile, businesses have been reluctant to invest, burned by over-investment and shackled by debt accumulated in the 1990s. Weak profits are also holding back investment and many economists believe the manufacturing sector already has slipped back into recession.

The US commerce department reported this week that orders for costly manufactured goods weakened 2.3% in September after dipping 0.4% in August. With investment in the doldrums, the fear is that once consumer confidence grows, the lone pillar holding up the American economy will topple.

The Fed's move takes some pressure off the Bank of England's monetary policy committee (MPC), which will announce its own decision on interest rates at midday tomorrow.

At its last meeting last month, three of the nine MPC members voted in favour of lower rates to counteract a slowing global economy. But they were overridden by the majority who fear that lower borrowing costs will only pour fuel on an already overheated housing market.

While the MPC may not lower rates tomorrow, analysts still expect the Bank to cut the cost of borrowing before the end of the year. The European Central Bank, which also announces its decision tomorrow, is not expected to ease rates.