Fed warns of slow recovery as rates fall to 40-year low

The US Federal Reserve last night doused hopes that the world's biggest economy was on course for a rapid recovery from recession when it cut interest rates for the 11th time this year in an attempt to rekindle growth.

Reducing the Fed fund's rate to a 40-year-low of 1.75%, it warned that the worst may not be over for the US - a hint that further reductions in the cost of borrowing may follow.

Share prices on Wall Street have recovered all the ground lost after the terrorist attacks on New York and Washington in September in anticipation of a bounce-back from recession early next year. But with US manufacturers warning yesterday that they saw little sign of improvement until the second half of next year, the Fed responded yesterday to sharply rising unemployment and slowing retail sales by shaving a quarter-point off rates.

"Economic activity remains soft, with underlying inflation likely to edge lower from relatively modest levels," the Fed said in a statement. It added that "the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future".

Interest rates in the US started the year at 6.5%, but on January 3 the Fed began its policy of aggressive easing to combat signs of a looming recession in the wake of the collapse of the dot-com bubble. The economy was already contracting by the time of the September 11 attacks, since when the cost of borrowing has been halved.

In the financial markets, share prices and the dollar barely moved in response to what had been a widely expected decision.

Dominic Konstam, of Credit Suisse First Boston, said: "We expect the Fed to cut rates another quarter percentage point in January."