Fed to cut rates again

It is a foregone conclusion that the US Federal Reserve will cut rates again today in its aggressive campaign to avert a hard landing for the economy.

Most economists expect the Fed's chairman, Alan Greenspan, and his colleagues on the policy-making open market committee to trim rates by 0.25%, the seventh time they have eased monetary policy this year. Mr Greenspan started cutting rates at the beginning of the year when the economic warning lights began flashing and rates have come down by 2.75% to the current level of 3.75%.

After almost a decade of expansion, the US economy was going to stall at some point. The trouble began in March last year, when the dot.com bubble burst, sending internet shares crashing. Any notion that turmoil in the internet sector would be localised was soon dispelled as investors dumped technology shares as well.

Punters suddenly woke up to the fact that hi-tech companies such as Cisco, which makes internet infrastructure equipment, and Nortel, the telecommunications equipment manufacturer, had over-invested massively just as business confidence began to ebb.

That loss of confidence has translated into thousands of job losses in recent months. Blue-chip American companies, from Ford, the world's second largest car maker, to American Express, the financial services giant, and AOL-Time Warner, the media group, have all axed thousands of jobs.

The ripple effect has reached Britain as well, with manufacturing companies especially hard hit through a combination of the American slowdown and a strong pound.

In a downbeat assessment of the US economy, Mr Greenspan told Congress last month that the pressure on profits had been "unrelenting". But he held out some hope by saying that the early and aggressive rate-cutting programme started in January, coupled with the tax cuts introduced by the Bush administration, should "be increasingly affecting economic progress as the year progresses".

The economic data as usual are mixed, but one encouraging sign came yesterday with the release of the index of leading economic indications, an important gauge of future prospects for the US economy. The Conference Board, a private research group, said the index, which tracks consumer expectations among other things, rose in July for the third consecutive month.

Against that, revised economic figures next week are expected to show that the US economy did not grow in the second quarter at all, the first time that it has not expanded in seven years.

It will take a few months for the rate cuts to work themselves through the American economy and economists believe that the Fed is coming to the end of its series of rate cuts - with possibly one more move due in October - and is waiting to see whether its medicine takes effect.

If history is any guide, lower interest rates usually do restore confidence eventually. The question is whether America, the engine for global growth, will perk up early next year, or later.

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