Plunge in corporate profits prompts further quarter-point cut in US rates

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The Independent Online

The US central bank cut its main lending rate by another quarter of a percentage point yesterday, and signalled that it was prepared to take rates even lower if necessary to fend off a recession. It was the bank's sixth rate cut this year, and brings the federal funds rate down to 3.75 per cent, its lowest for more than seven years.

In its accompanying statement, the Federal Reserve made it clear that it still saw recession as a greater threat than inflation, despite mixed economic indicators in recent weeks, and indicated that it was prepared – contrary to some forecasts – to cut rates again, should the US economy slow further.

Yesterday's cut had been confidently predicted by Wall Street analysts, with the only debate focused on whether it would be a quarter point or a half point. Share prices slipped back immediately after the announcement, in disappointment at the size of the rate cut.

The new cut showed the Fed less confident than some analysts that the risk of recession had been averted. The Federal Reserve had gone into its two-day summer meeting on Tuesday, as new figures showed consumer confidence in June at its highest point of the year, orders for consumer durables unexpectedly jumped in May, and an increase in sales of new homes.

Many economists warned, however, that while consumer confidence was holding up well, bad news still outweighed the good. They pointed out that the unemployment rate was up, industrial production in May fell for the eighth month running, and corporate profits were still threatened by weak sales at home and abroad. "There is a real risk of recession unfolding," said William Dudley of Goldman Sachs in New York, who chairs the Bond Market Association's economic advisory committee, on the eve of yesterday's move. "But I don't believe we're in recession right now."

There is division among economists also about the cumulative effect of the earlier interest rate cuts. While some are evincing concern that the reductions have so far failed to nudge the growth rate upwards, others have said that the effect of any rate cut usually takes up to nine months to make itself felt and that an upturn can be expected from the august onwards, when it could be reinforced by the Bush Administration's tax rebates.

The first cheques are due to arrive in people's mail boxes next month, and the Administration is hoping that the windfall, however modest, will fuel growth by triggering a rise in consumer spending.

The dollar inched higher to 86 cents against the euro after the rate cut, from around 86.2 cents just before the announcement. The euro had earlier gained against the dollar after Wim Duisenberg, the president of the European Central Bank, said he believed the currency's fall had bottomed out. In an interview with an Italian newspaper, Mr Duisenberg said the outlook for European growth was satisfactory. "I believe that the fall of the euro has finished," he said.

Christian Noyer, the ECB's vice-president, struck a similar note, saying he was confident Europe would grow faster than the United States this year and that the current euro-dollar exchange rate could not be sustained. "I'm quite confident that growth in Europe this year will outdo that in the US," Mr Noyer told reporters.

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