Worried US cuts rate again

Alan Greenspan, the chairman of the US federal reserve, last night cut American borrowing costs for the seventh time this year, in his battle to keep the global economy from sliding into recession.

He indicated that rates could be cut further in the coming months, a sign of the US authorities' concern about the dangers still facing the world's biggest economy.

Yesterday's cut was widely expected, with US companies continuing to report falling profits as the downturn which began in the US spreads across the Atlantic. It is likely to put pressure on the European Central Bank - which has been reluctant to cut its own rates - to follow suit.

So far this year the federal reserve has slashed three percentage points off borrowing costs, its most aggressive rate-cutting campaign since the last recession. Yesterday's quarter per cent cut brings the cost of borrowing in the US down to 3.5 per cent, its lowest level since March 1994.

Announcing the move, the Fed said that it still sees faltering growth as a bigger threat to the economy than inflation, signalling that it is prepared to cut rates again should the outlook deteriorate further.

"They have left the door wide open for another cut on October 2," said Thomas Carpenter, chief economist at ASB Capital Management in Washington.

In comments which could help push the European Central Bank to cut rates at its meeting next week, the Fed's open markets committee blamed slowing growth outside the US for its economic woes. It said that while US consumers have continued to spend, corporate profits are falling and businesses have slashed investment plans.

The quarter point cut briefly cheered the stock markets, but share prices started sliding again, as traders digested the implications of the move. Both the Dow Jones Industrial Average of blue chip shares and the technology-laden Nasdaq composite index gave up earlier gains after the Fed announcement.

"I think people were hoping for a little more encouragement from the Fed," said Edgar Peters, chief investment officer at Panagora Asset Management in Boston.

Bruce Steinberg, chief economist at Merrill Lynch, the US investment bank, said he would have welcomed a 50-point cut. The US economy has stuttered to a halt over the course of the past year, with output growing at an anaemic 0.7% annual rate in the April-June quarter of 2001 after growing at a 1.3% pace in the first three months of the year.

Some analysts believe revised second quarter GDP figures, due to be issued next week, will show the economy slowed to a standstill or even contracted during the second quarter for the first time in more than 10 years.

But while some in the markets were disappointed that the Fed did not deliver a deeper cut, other analysts detected signs that the economy may finally be starting to respond to the earlier rate reductions. The number of people claiming unemployment benefits has fallen slightly and the stockpiles of unsold goods are decreasing. Despite the economic slowdown, the US housing market has remained buoyant and has provided a vital prop for household spending.

Ian Shepherdson, chief US economist at High Frequency Economics, said: "I think we are in a turning point. All they would be doing [by making further cuts] is adding fuel to the fire for next spring's recovery." He believes that both the Fed and the Bank of England are too concerned with the declining manufacturing sector. "Manufacturing seems to be the driving force on both sides of the pond, which is potentially a mistake."