Rates back to JFK's levels

The US Federal Reserve last night underlined its determination to prevent the World Trade Centre disaster triggering a global slump when it slashed US borrowing costs by half a percentage point, and signalled it was prepared to make further reductions.

Yesterday's cut, the ninth this year and the second since the attacks, took the cost of borrowing to 2.5% - its lowest level since President Kennedy was in the White House. Taking account of inflation, the "real" rate of interest has now dipped into negative territory.

Analysts said the Fed's move could spark another round of global rate cutting, with the Bank of England the next to announce its decision on borrowing costs, at midday tomorrow.

As a senior White House adviser became the first US official to admit that the shock to investors and consumers from the attacks on New York and Washington could send the economy into recession, policymakers' concern about the outlook became clear.

In a statement after the decision, the Federal Reserve board, chaired by Alan Greenspan, said: "The terrorist attacks have significantly heightened uncertainty in an economy which was already weak"

The statement said business and household finances were being "further dampened" but insisted that the "long-term prospects for productivity growth and the economy remain favourable".

The Fed added that the "risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future", a clear hint that it is prepared to support the economy with further cuts to borrowing if the reductions so far fail to rekindle investor and consumer confidence.

"We've got hit with something we have never seen before," said James Glassman, economist at JP Morgan in New York. "As the economy absorbs these shocks, it's appropriate for the Fed to be stepping on the gas as much as it would in a recession."

On Wall Street, the cut had been widely predicted and the reaction of traders was muted. The Dow Jones Industrial Average shed 9.47 points, or 0.11%, to 8,827.36, in the wake of the decision, after rising 0.6% earlier in the day.

The Fed's move looked set to be matched by a stimulus in fiscal policy, as President Bush gave his strongest hint yet of a package of up to $100bn in tax cuts and public spending.

Speaking after meeting Congressional leaders, he said: "What's needed is a package big enough to get the economy running in the short run but small enough that it doesn't affect long-term interest rates."

The package is likely to include tax breaks for businesses, aid for tourism and leisure in dustries and a possible reduction in payroll taxes, which could benefit the lower paid.

Most independent economists believe the US economy is already contracting and yesterday White House economic adviser Glenn Hubbard conceded that a recesssion was probable. "These 'supply shock' consequences of the attacks substantially reduce the growth rate of GDP during the third and fourth quarters of 2001, and increase significantly the likelihood that the economy is in a recession," he told Congress.

Some Wall Street analysts said yesterday's rate cut would not be enough to revive confidence among consumers and businesses.

Lynn Reaser, chief economist at the Bank of America in New York, said economic data on the effect of last month's terrorist attacks had barely begun to come in.

Before last month's attacks, economists had hoped for an upturn in the US economy this autumn. The attacks struck a devestating blow to industries as diverse as tourism, advertising and retail outlets.