Fed trims interest rates by quarter of a point

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The Independent Online

The Federal Reserve rounded off 2001 with yet another interest rate cut yesterday, in what may be its last move in the current cycle to kick the sagging US economy back into life.

At its last session of the year, the central bank's policymaking Open Market Committee reduced its benchmark federal funds rate by a quarter of a percentage point to 1.75 per cent. It is the eleventh cut since 1 January, bringing rates to their lowest level since Dwight Eisenhower was in power in the 1950s.

In a statement accompanying the decision, the Fed said that while there were signs that the weakness in demand that was exacerbated by the 11 September terrorist attacks was now abating, these "were still preliminary and tentative". The balance of risk remained "towards conditions that may generate economic weakness in the future". Yesterday's cut came amid cautious hopes that the recession, which officially began last spring, is drawing to an end. According to a survey of leading economists published yesterday, the consensus was for GDP to contract by as much as 1.3 per cent in the current quarter, following the revised 1.1 per cent fall in third quarter 2001, but for a gradual resumption of growth in the new year.

"This is a balanced approach," said Edward Boehne, a former member of the Federal Reserve Board. "But they've left the door open to further cuts. This is a very sensitive part of the business cycle. The Fed needs to feel its way through and see how things play out." The quarter-point reduction had been largely anticipated by Wall Street, which continued modestly higher after the announcement.

Hopes that the recession is bottoming out are pinned on a combination of the cumulative effects of 4.75 points lopped off interest rates since 1 January, plus the emergency spending measures passed by Congress since the attacks. Also, though the jobless rate jumped to 5.7 per cent in November, a six-year high, there have been signs that holiday season spending is picking up, suggesting that consumer confidence may at last be on the mend.

But the chances of speedy passage of the major $60bn (£42bn) to $70bn stimulus package sought by President George Bush are now tiny, thanks to partisan feuding on Capitol Hill. The best to be expected now is that Congress will pass a scaled down version before its Christmas break. But, economists say, whatever is decided will be too little and too late to greatly affect any recovery.