Fed cuts rates for sixth time

The US Federal Reserve last night cut interest rates for the sixth time this year in its continuing battle to keep the American economy from sliding into recession.

Last night's rate cut of 0.25% - only half the size of the previous five reductions - took borrowing costs down to 3.75%, the lowest level since the spring of 1994.

But though the cut was smaller than many on Wall Street had been expecting, dealers were concerned about bearish comments from the Fed accompanying the decision.

On Wall Street the equity market's initial reaction was one of disappointment with the Dow Jones industrial average losing around 50 points in the first 30 minutes after the announcement. That response could spread to European stock markets today. "It is going to be bad news for European markets," said one UK based equity strategist last night.

Both the Bank of England and the European Central Bank are due to meet to decide on interest rates next week. With Germany on the brink of recession and France showing signs of growing less quickly than expected, last night's decision could increase the pressure on the ECB to cut rates at its last meeting before the summer break.

However recent comments from senior bank officials sug gest that UK rates are likely to stay on hold, despite the US move. The Fed cited declining corporate profitability and spending, weak consumption growth and slowing economies elsewhere in the world as factors behind its decision. With demand slackening the Fed said that easing prices, both for labour and goods, would help keep inflation in check.

"The risks are weighted mainly towards conditions that may generate economic weakness in the foreseeable future," it warned.

The Fed has now cut interest rates from 6.5% at the start of the year but there is evidence it might still not have succeeded in staving off recession. Last weekend the National Bureau for Economic Research cautioned that: "Data normally considered by the committee indicates the probability that a [US] recession began recently."

Yesterday's cut was criticised by bearish economists who wanted tougher action. Larry Kudlow, chief economist at ING Barings, called the move "weak-kneed and knuckle-headed" on CNBC. Richard Berner, chief US economist at Morgan Stanley, put the likelihood of a further 25 basis point cut in August at about 50-50.

Meanwhile, the governor of the Bank of England, Sir Eddie George, said last night that signing up for the single currency could give Britain the "big advantage" of a huge trading area and better exchange rate stability.

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