US cuts interest rate

The US Federal Reserve reinforced its determination to steer the American economy off the rocks of recession yesterday by cutting interest rates by a half-percentage point for the third time in as many months.

The reduction, which takes the crucial federal funds lending rate to 5%, had been widely anticipated in financial markets, although equity dealers were disappointed that it was not bigger.

In its statement, the Fed warned that despite January's two half-point cuts in the cost of borrowing the economy was still fragile, and signalled that it stood ready to move again if necessary before its next scheduled meeting in May by saying that in a rapidly evolving situation, it would "need to monitor developments closely".

"The risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future," the Fed said.

Ahead of the decision dealers had been pinning their hopes on a three-quarter point cut to put a floor under tumbling equity markets unnerved by a rash of profit warnings from hi-tech groups such as Intel, Cisco Systems and Motorola.

For many in the financial markets the cut was not enough to save plunging share prices. Before the close the technology dominated Nasdaq composite index had lost 77.26 points, or 3.96%, at 1,873.13. The blue chip Dow Jones industrial average fell 209.10 points, or 2.1%, to 9,750.01.

"[The Fed] is dancing to the music of the economy and not responding to cries for help from the stock market," said David Jones, chief economist at Aubrey G Lanston & Co.

Alan Blinder, professor of economics at Princeton, told CNBC that the Fed might have chosen the smaller cut in order not to appear to be saving the stock market. Mr Greenspan had spent most of the past two years warning of the "irrational exuberance" among US investors driving share prices to unprecedented levels.

Following its normal procedure, the White House refused to comment on the independent central bank's decision, but President Bush expressed confidence about the long-term outlook for growth.

"People have got to know that I've got great faith in the American economy," Mr Bush told reporters when asked to reconcile his optimistic comments on Monday followed by him saying on Tuesday that growth was slowing down. "I was talking about the long term health of our economy is going to be very strong."

"We've got some problems, some short term problems," he added at the end of an Oval office meeting with Israeli prime minister Ariel Sharon. "If Congress were to act quickly on my tax stimulus package, it would make our recovery quicker."

The Fed's action will heighten expectations of another rate cut by the Bank of England's monetary policy committee - although the chancellor, Gordon Brown, insisted the UK was well placed to keep growing despite the slowdown in the US.

Defending his recent Budget Mr Brown told the Commons Treasury committee: "The major economy with which we trade - the rest of Europe - is experiencing growth this year, above 3%. So if 50% of our imports and exports are with the European market, we're still in a position to grow as a result of trade."

While conceding that the economic slowdown in the US could have some impact on the UK, he said sturdy consumer spending would help offset any repercussions.

"The disappointing factor in the world economy is the failure of Japan's economy to grow," Mr Brown said.