US to cut rates by 75 points 'in weeks

Fear of creating panic over US financial prospects may prevent the Federal Reserve from making an immediate cut in interest rates, despite market expectations.

However, the Fed is expected to cut rates by 75 basis points in the coming weeks to shore up consumer and business confidence following last Tuesday's terrorist attacks in New York.

'Markets are now discounting a cut in the Fed funds rate of 75 basis points. Before last week's attacks, most people thought the monetary easing cycle was over,' says Mike Gallagher of Ideaglobal, a financial analyst.

The next scheduled meeting of the Federal Open Markets Committee is not until 2 October. This has led to speculation that Fed chairman Alan Greenspan will make his third inter-meeting rate cut of the year this week, after New York stock exchanges re-open.

However, in a research note, economists at Credit Suisse First Boston warn that Fed policy moves would be 'conditioned by the desire to advertise a degree of orderliness, and to avoid any impression of policy panic'.

'Monetary easing can only be contemplated after adequate liquidity has returned to the market,' notes CSFB.

Last week, the Fed and the European Central Bank pumped money into the financial system to prevent money market rates rising because of liquidity constraints.

The first indications of the effect of the New York attacks on consumer confidence will be available in surveys out on Tuesday and Friday next week. Negative figures could provoke a co-ordinated round of monetary easing from international central banks, as occurred in the wake of the 1987 stock market crash.

Group of Seven finance ministers are scheduled to meet in Washington on that Friday. An attempt to intervene to stabilise currency markets might also be on the agenda, should the dollar suffer a sharp fall.