Fed cuts US rates by 0.25%

The US Federal Reserve Board today cut interest rates by 0.25% to 3.75%, the lowest since April 18, 1994, amid increasing signs that America is already in recession.

It was the sixth time this year that the US central bank has reduced rates. The Fed's policy-making body, the federal open market committee, said:

"The patterns evident in recent months - declining profitability and business capital spending, weak expansion of consumption and slowing growth abroad - continue to weigh on the economy."

The policy-makers added that their chief concern remained the threat that the weak economy could tip into recession. The Fed expected inflation pressures to remain contained, but was not closing the door to further interest rate reductions, it said.

Analysts were widely expecting today's rate cut, but were divided as to whether the Fed would opt for a half- or a quarter-point cut with which to brace the US's flagging economy.

This year's five earlier rate cuts prompted stock market rallies, but analysts say today's rate cut might not bring buyers back to Wall Street, because investors are still looking - so far in vain - for signs that companies are beginning to benefit from lower borrowing costs.

The rate cut will "be a focal point today, and then it'll go into the dustbin," said Philip Dow, managing director of equity strategy at Dain Rauscher Wessels in Minneapolis. "I think the market is looking for real fundamental guideposts for a turnaround."

Mr Dow said that evidence would include positive signs about profits, new hirings, or encouraging government reports on the state
of the economy. "Those just aren't coming," he said.

There has been little to cheer the markets from the corporate front in recent weeks, as one company after another has announced profit warnings and layoffs.

Bayer, Europe's second biggest chemicals group, today joined the long list of companies warning of lower second quarter profits due to slower global economic growth. Yesterday, Merrill Lynch, the US powerhouse of investment banking, stunned Wall Street by saying that its second quarter profits would fall by almost a half. Merrill has axed 3,800 jobs this year, and more job losses can be expected as profits decline.

As companies around the world retrench, the HSBC economics team predicted: "This US recession will be deeper and long than the consensus currently expects."

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Related special report
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