Pressure builds for rate cut

The US Federal Reserve was under mounting pressure last night to bolster confidence in the damaged American economy by cutting interest rates before the New York stock exchange reopens.

As the US government bond markets stuttered into life yesterday for the first time since the atrocity, it was immediately apparent that traders did not expect Federal Reserve chairman Alan Greenspan to desert them in their hour of need.

Traders expressed disappointment that the European Central Bank, the first big monetary authority to hold a meeting since Tuesday's attack, failed to announce a cut in borrowing costs after the ECB's governing council kept rates for the 12-member eurozone on hold at 4.25% yesterday.

While the ECB's president, Wim Duisenberg, argued that to have moved so quickly would have smacked of panic, the bank worked with the Fed to ensure there were sufficient funds in the markets to prevent gridlock in the nervous financial system.

At the same time, Sir Eddie George, the governor of the Bank of England, reiterated that central banks were ready to provide sufficient liquidity to keep the markets from collapsing. The Treasury, along with the financial services authority, was also scrutinising those sectors of the economy - particularly insurance - seen to be at highest risk.

Officials at the International Monetary Fund and the World Bank are considering cancelling their annual meetings, in the wake of the security alert in the US capital. The final decision is up to the US Treasury, but senior staff at the two Washington institutions believe the meetings pose too much of risk for the hundreds of finance ministers and government officials planning to converge on Washington.

The world's biggest investment banks, many of which had large operations in the Manhattan financial district, were also taking steps to avoid accusations of profiteering. Large speculative deals were absent from the market and the trading that did take place was said to generated by moves to close out positions which might be too risky.

The restoration of trading in the world's most important bond market occurred without the full involvement of the biggest trading firm - Cantor Fitzgerald - which may bear some of the worst human scars of the tragedy. It employed 1,000 people in the World Trade Centre towers and its list of traced people runs to little more than 300.

Treasury bonds are a traditional haven in times of crisis and the price of short- term securities rose sharply once trading resumed. As a result, the yield on two-year bonds - which is inversely related to the price - hit record levels below 3%. Traders said expectations of an early cut to inter est rates to boost the economy had prompted the fall in short-term yields. However, fears that the US government will have to borrow heavily in years ahead to fund the reconstruction of Manhattan and keep the financial sector afloat kept longer-term borrowing rates high.

Shares in London rose for the second successive day, with the FTSE closing 61 points up at 4943. However, emerging markets suffered heavier losses, with shares in Turkey down 10%, while Brazil's currency sank to a record low and the country's share market plunged 5% to its lowest levels for two years. "This is a 'get me out of here' reaction," said Ken Colli, chief Latin America economist at Crédit Lyonnais. "It's a flight to quality and it may take a few weeks for things to settle down."

On the foreign exchanges, the euro rose slightly against the US dollar to just above 91 cents, but dealers said trading was limited by concern that central banks would step in to intervene if the greenback lost ground sharply.