Cut in US growth quells fears of big rate increase

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The US government yesterday cut back sharply the economy's rate of growth in the first quarter of the year, making it less likely the Federal Reserve will dramatically raise interest rates next week.

An increase in the central bank's benchmark federal funds rate from the current 45-year low of 1 per cent has long been regarded by financial markets as a virtual certainty.

But yesterday's downward revision of Q1 GDP by the Commerce Department, from a provision 4.4 per cent annual rate to 3.9 per cent, has quelled fears that the Fed will boost rates by 50 basis points, instead of the 25-point rise that the chairman, Alan Greenspan, has been signalling for weeks.

Nonetheless the adjusted figures came as a disappointment to Wall Street, which had expected little change. The main cause was a sharp upward revision in US imports in the January to March period - suggesting the country's trade deficit is on pace for a new record this year as the rebounding economy sucks in imports from Europe and other countries where expansion is slower.

Another worrying pointer for markets was an upward adjustment in the core price index for consumer spending to 2 per cent in the quarter, from the initial 1.7 per cent.

Mr Greenspan is known to take the GDP price indicator as a reliable guide to inflation. The jump is conclusive proof that inflation, now running at an annual 3 per cent by some measures, has replaced deflation as a threat to financial stability.

By most standards, however, the US economy is performing strongly. Even the scaled-back Commerce Department figures suggest overall 2004 growth will be at least 4 per cent - enough to keep the politically sensitive, job creation figures moving steadily upwards.