Greenspan signals rate cut

Alan Greenspan, the chairman of the US Federal Reserve, reacted to fresh signs of distress among America's blue-chip firms yesterday with the grim message that the sharp downturn in the world's biggest economy is likely to continue.

Despite six cuts in interest rates since the start of the year, Mr Greenspan unnerved both share dealers and foreign exchange traders when he told Congress that "we are not free of the risk that economic weakness will be greater than currently anticipated".

The Federal Reserve chairman added that a further easing of monetary policy might be needed - which was taken as a clear sign by Wall Street that the central bank would shave at least 0.25 percentage points off US interest rates when it meets late next month.

With American Express announcing 5,000 job cuts following a profits warning, slowing revneue growth from AOL Time Warner - the world's largest internet and media company - and the first loss recorded by Ford since 1992, Mr Greenspan stressed that the pressure on profits had been "unrelenting".

On Tuesday night, the world leader in the manufacture of computer chips, Intel, published figures showing that its earnings in the second quarter were more than 75% lower than the same period in 2000 after problems caused by slack demand for personal computers, a downturn in the economy and a price war with its competitors.

Mr Greenspan said that the telecommunications sector could expect little good news over the coming months. "A period of substantial liquidation of stocks still seemingly lies ahead for these products."

Concern that the American recovery will be delayed prompted the dollar to lose more than a cent against the euro to $0.87, while both the hi-tech Nasdaq index and the Dow Jones industrial average were marked down once the markets had time to digest Mr Greenspan's testimony to the house of representatives' financial services committee.

He said that the early and aggressive rate-cutting programme started by the Federal Reserve in January together with the tax cuts introduced by the Bush administration should "be increasingly affecting economic progress as the year progresses".

However, he warned that the American economy faced a number of hurdles that could imperil recovery. Some ana lysts believe that the US is increasingly faced with the twin problems of falling activity and rising prices.

Data released in Washington yesterday showed that the government's main measure of inflation, the consumer price index, rose by an underlying 0.3% in June, once volatile elements such as energy and food were stripped out.

Economists had been ex pecting a smaller rise of 0.2%.

Mr Greenspan said that rising energy costs together with the impact of a tight labour market on wages had added to the financial problems of the US corporate sector, which had responded by cutting back on investments and running down stocks.

American Express said it was setting aside $1.2bn (£860m) to cover the cost of laying off 5.6% of its staff. It blamed the move on a weak stock market and poor economic conditions, adding that it saw little prospect of improvement throughout the rest of this year and even further, into 2002.

AOL Time Warner was the most actively traded stock in New York yesterday, losing almost $4 to $45.50 in early dealings as concern about fu ture earnings growth offset figures from the company showing that its cost-cutting programme had pushed up quarterly earnings.

Apple was the latest company to underline the weakness of demand for the once booming technology sector. In a warning to the markets, it said that earnings in the second half of the year were likely to fall short of expectations.