Fed cuts US rates by half-point to lowest levels since the Kennedy era

Economic Downturn

The US Federal Reserve yesterday cut its key interest rates by half a percentage point – bringing them to their lowest level since 1962 when Kennedy was in the White House. The central bank cuts its key Fed Funds rate to 2.5 per cent. The discount rate was also cut, by a similar amount, to 2 per cent.

The focus now shifts to the Bank of England which is expected to cut rates by a quarter-point to 4.5 per cent, their lowest since 1963.

The US move, which had been widely expected, came as President George Bush and Congress sought to agree a new economic stimulus package.

It was the ninth cut this year, and the second since the terrorist attacks of 11 September, which almost certainly tipped the $10 trillion US economy into recession.

In its statement, the Federal Open Market Committee warned that after the recent terrorist attacks, there was a "significantly heightened risk" of economic weakness.

"They did the minimum, but I'm not overjoyed by this," one trader said. This mood was reflected on Wall Street where the Dow Jones index dipped into negative territory in the minutes after the decision.

Although economic growth in the second quarter had been revised upwards – albeit to a meagre 0.3 per cent – the US, hit by massive cutbacks in the airline industry and a slump in the hotel and travel business, is almost certainly now in recession, and possibly a sharp one. Adding to the gloom, the second largest American personal computer maker Compaq said yesterday it would report a third-quarter loss, citing uncertainty after 11 September as a major factor.

First-time jobless claims in the week following that of the attacks soared to 450,000, the highest for nine years, while the closely watched consumer confidence index published by the University of Michigan plunged to its lowest level in eight years.

"This is the worst bout of pessimism since 1990 (the run up to the Gulf War)" a university spokesman said.

Economists do not expect that this reduction of its own will reverse the economy's decline, given the long lead time before rate cuts feed through into the wider economy.

Mindful of the eight cuts since January, Alan Greenspan, the Fed chairman, urged a wait-and-see stance in recent testimony to Congress. "It's far more important to be right than quick," he said.

But the President and both parties in Congress are united on the need for a further package worth anything up to $100bn to boost demand.

If today's rare mood of bi-partisanship is to hold, the measures will have to be a mix: tax cuts, possibly including corporate tax cuts, to satisfy the Republicans, combined with tax rebate and expanded unemployment and health care benefits sought by Democrats.

Meanwhile in the UK, business groups called for the Bank to cut rates amid signs confidence among both businesses and consumers had crumpled after the US attacks.

The Engineering Employers' Federation published a survey showing its sector was headed for its worst recession since the early 1980s. "We continue to call for rate cuts," said Stephen Radley, its chief economist. "This year is on course to be worse than the early 1990s recession."

Two-thirds of economists polled by Reuters forecasted a quarter-point cut to 4.5 per cent, the lowest level since 1963.

Pressure is also building for tax cuts ahead of the Government's pre-Budget report next month. The EEF put itself on a collision course with the Chancellor with a plea for a £1.1bn package of tax cuts. It called for a £1bn cut in employers' national insurance and a reduction – or moratorium – in the climate change levy that costs industry £100m a year.

The plea came a day after Gordon Brown's aides gave a strong hint he would rather raise taxes than trim public spending. Martin Temple, EEF director-general, said: "If there was ever a time for help, this has to be it."