Fed ready to cut again

The US Federal Reserve will cut interest rates by at least another percentage point to stave off recession and shore up confidence in fragile global markets, America's financial markets believe.

The Bank of England, which cut rates to their lowest since 1964 yesterday, is also expected to cut rates further amid fears that last week's terrorist atrocities in Washington and New York could hamper economic growth.

Hopes that the Fed will quickly reduce rates again after its emergency half point cut to 3% on Monday, helped Wall Street stage a fragile recovery yesterday after Monday's biggest-ever points fall.

By lunchtime, the Dow Jones Industrial Average was up 74 to 8,995, as money market traders revealed that the Fed was already making funds available to financial institutions at 1.75%, in a move which they said signalled the market's expectation of further cuts.

"Policy is in a definite easing bias in the States. The Fed will cut rates to whatever level they feel is appropriate and that could be lower than 2.5%," said David Brown, economist at Bear Stearns.

Yesterday, Britain and Japan's central banks followed the lead of the Fed and the European Central Bank in cutting rates. The Bank of England cut by a quarter of a point to 4.75% while the Bank of Japan shaved its official discount rate from 0.25% to a new low of 0.10%.

London traders believe that further UK rate cuts are possible, despite yesterday's official figures showing that inflation broke through its target range of 2.5% in August for the first time in 2 years.

The Bank's action was not enough to prevent the blue chip FTSE 100 index sliding 50 points to 4,848, although it did regain some losses after the cut was announced at noon.

Telecoms stocks were among the few to resist the downward slide as a result of expectations that a fear of flying will result in more business being done over the phone. Shares in Vodafone rose 6.75p to 139.75p and British Telecommunications rose 22p to 398.5p, while British Airways fell 2p to 174p.

Media company shares such as Carlton, which was the FTSE's biggest faller with a 37p drop to 178p, fell on concerns over the impact an economic downturn will have on advertising.

Richard Kersley, analyst at CSFB, said: "The market is still very risk averse...even though equities are pretty lowly priced."

In the US, data began to demonstrate the impact of last week's terrorist assault as Michael Niemira, economist at Bank of Tokyo-Mitsubishi in New York, produced statistics which showed sales at top US chain stores had dropped 1.4% in the week of the attack.

As concerns mount that American consumers will help lead the economy into recession by refusing to shop, Republicans were said to be willing to pool their support for a reduction in capital gains tax with Democrats' enthusiasm for income tax credits, in an attempt to avert the economy's downward plunge.

On the markets, the New York stock market, open for only its second day since the terrorist attack, was busier than usual despite the Jewish holiday of Rosh Hashanah. Airline stocks rose up on hopes of a government bail-out. Confident trading statements from online auctioneer eBay and electrical retailer Best Buy helped push up technology stocks.

More brokers were back at work as financial firms found increasingly outlandish office space. Lehman Brothers booked 650 rooms at Manhattan's Sheraton hotel for use as an emergency trading floor.

The dollar regained its composure, remaining stable against most major currencies, while gold prices slipped after hitting a high on Monday as a haven for bewildered investors. Trading at the Nymex commodities exchange was delayed for 45 minutes as the building was evacuated in a security scare. But the news was not all good - there were profit warnings from American Express, Citigroup, the New York Times, software company Oracle and avionics company Honeywell.

All of them warned that they were likely to suffer in the fall-out from last week's terrorist attacks.