Fed cuts rates again

The US Federal Reserve today cut interest rates to their lowest level for almost 40 years in an increasingly frantic effort to cushion America from recession.

In lopping off a half-point, the US central bank lowered the cost of borrowing to 2.5%, levels not seen since 1963. It was the ninth interest rate reduction this year, and the second since the September 11 suicide attacks on New York and Washington.

With an American recession virtually certain, the Fed's policy-making body, the open market committee, was forced into yet another aggressive move as US economic indicators went on red. Consumer confidence has slumped, orders of cars and computers have fallen, and companies - notably airlines - have announced tens of thousands of layoffs.

In other stark evidence of declining confidence, Wall Street suffered its worst sell-off since the great depression following the attacks. It clawed back some of the losses last week, but after having fallen 30% of its highs of last year, Wall Street is officially in a bear market.

"My thinking is that the Fed is expecting a recession, perhaps a sharp recession, and that changes the calculus. Prior to September 11, they were looking to find an end to their rate-cutting cycle," said former Fed chairman Alan Blinder, now a professor at Princeton University. As the Fed resorts to cutting interest rates to temper recessionary forces, the White House and Congress have been discussing a $100bn stimulus package that includes tax cuts. But Mr Greenspan cautioned about action that lead to big budget deficits down the line.

In testimony to the senate banking committee on September 21, Mr Greenspan said: "I would strongly suggest that while there is an obvious strongly desired sense to move rapidly, that it's far more important to be right than quick."

Even as the Fed cut rates, the Organisation of Economic Cooperation and Development today warned that it may take until 2003 before business and consumer confidence recover from the September 11 attacks. The OECD said America, the world's largest economy, will slide into recession, while growth in Europe will be weak and the outlook for Japan is "dismal".