US interest rates held at 1.75%

The US Federal Reserve today left interest rates unchanged at 1.75% in the hope that low borrowing costs would fuel consumer spending and sustain economic expansion.

The US central bank has held short-term interest rates at 1.75% since last December, their lowest level in 40 years.

Just before today's meeting of the Fed's policy making body, the federal open market committee, the commerce department reported a relatively strong 1.2% rise in retail sales in July to a seasonally adjusted $304.2bn (?198.6m), thanks to a rise in sales of new cars. Excluding cars, sales were up a modest 0.2%, evidence that consumers were still spending despite the sharp fall in share prices.

Economists had expected the Fed, which has cut rates 11 times since early 2001, to start raising the costs of borrowing some time this year. But recent evidence of a weakening economy has forced analysts to revise their forecasts. Many believe that another rate cut is now in the offing.

The economy grew by only 1.1% in the second quarter after a 5% rebound in the first three months of this year. In other signs of a faltering recovery last month, manufacturing slowed down considerably, consumer confidence sank, and companies added only 6,000 jobs, keeping unemployment stuck at 5.9%.

Before the Fed announced its decision, President George Bush had done his best to talk up the economy amid public anger at a series of Wall Street scandals from Enron to WorldCom that has helped pushed down shares.

There had been "some progress" in the economy, but more remained to be done, Mr Bush told an economic forum in Waco, Texas. The Bush administration has been criticised for its uncertain handling of economic policy, from the crisis in Brazil to its belated embrace of corporate reform.

"The trend is in the right direction," Mr Bush said, as he called for Congress to pass legislation to make the government the ultimate guarantor for insurers in the event of another terrorist attack, and to make
permanent a repeal of federal estate taxes.

He urged the investment industry to step up its self-policing, to complement a government crackdown on corporate fraud and help restore confidence in the markets. Mr Bush said the industry must adjust to accommodate ordinary, less financially knowledgeable Americans who have poured money into the stock
markets in recent decades.

Mr Bush and his economic team were holding a day-long summit, reminiscent of the roundtable discussions beloved of the former president, Bill Clinton. A series of panels, headed by the US treasury secretary, Paul O'Neill, and other economic team members, will sound out a diverse group of about 250 invited guests on their views on the economy.

Mr Bush's overall opinion poll ratings remain high after September 11, but people are less than impressed by his handling of the economy. It is a relative weakness on which the Democrats aim to capitalise ahead of the November mid-term elections, where a small swing would give them overall control of the Senate, where they have 50 of 100 seats. The Republicans hold only a six-member majority in the House of Representatives.