Gloomy Fed set to cut US rates

The US Federal Reserve Board signalled last night that it was standing ready to reduce borrowing costs to counteract the threat of a return to recession in the world's largest economy.

As President George Bush broke off from his summer holiday to convene an emergency summit on the economy, the Fed warned that faltering growth was now a bigger threat than inflation.

Announcing it was keeping its key interest rate unchanged at a 40-year low of 1.75% for the eight month in a row, it said in its accompanying statement that the economy was in danger of greater deterioration - its gloomiest assessment since March.

In the six weeks since the Fed last met, stock prices have plunged and a stream of revelations about corporate malfeasance has shaken investors' confidence and raised fears that the US could return to recession. The economy slowed sharply in the second quarter, expanding by an anaemic 1.1% annualised rate after surging by 5% in the first three months of the year.

The Fed's no-change decision initially cheered Wall Street, but the early gains were quickly erased. In midday trading, the Dow Jones was down 43.3 points at 8,645.56.

"The Fed is acknowledging that we could get a double-dip [recession], so they prepare for a rate cut by the end of the year if things don't get better," said Peter Cardillo, chief strategist for Global Partners Securities. "It's really mixed news for the market."

Mr Bush summoned a group of 250 handpicked academics, corporate chiefs and small investors and workers to Baylor University in Waco, Texas, for a special one-day conference intended to show that the White House was responding to rising concern among voters about the economy.

The president, whose last two speeches on the economy triggered further collapses in share prices, insisted that the recovery was back on track. "We're pleased with some progress, but we've got more to do," he said.

Derided by the Democrats as a television stunt with no substance, the gathering was a chance for the White House to blame last year's recession on the previous administration.

"There's no question our economy has been challenged by a recession that was beginning when we took office," Mr Bush said.

The White House is seeking to draw a line under the recent accounting scandals which have shaken investors' confidence in America's leading companies. Under a law rushed through Congress last month, chief executives have until 5pm today to vouch personally that their companies' accounts are accurate.

"I say as plainly as I can to chief executives, if you break the law, we will hunt you down, we will arrest you and we will prosecute you," Mr Bush said. "We expect the highest of high standards when it comes to corporate America. I want the books open and transparent, the numbers need to be real. The good news is that by far the vast majority of CEOs [chief executive officers] are honourable people."

Lawrence Lindsey, the most senior economic adviser in the White House dismissed talk of a so-called "double dip recession" - a second downturn following hard on the footsteps of last year's recession.

The Fed cut rates 11 times last year but failed to prevent the economy from going into reverse. US government figures released late last month showed that the downturn was deeper and longer than first thought.

Analysts believe household confidence is the key to keeping the economy afloat. With businesses still writing off billions of dollars in wasted investment during the hi-tech bubble, the economy will grind to a halt if consumers stop spending.

Mr Lindsey said that commerce department figures showing that retail sales rose by 1.2% in July were a sign of "very, very robust growth" in consumer spending.