The US Federal Reserve has cut interest rates by a
quarter of a percentage point to 1.75%.
It is the 11th cut the Fed has made this year, in its efforts to revive
the flagging US economy.
"Economic activity remains soft, with underlying inflation likely to
edge lower from relatively modest levels," the Fed said in is statement.
It added that while there were some signs of recovery in the economy,
these were "preliminary and tentative."
The Fed also cut its more symbolic discount rate by a quarter
percentage point to 1.25%.
Reaction
The quarter point cut had been widely expected and some analysts now
think further cuts are now unlikely in the short-term.
"I'm in the camp that says we're done, even though the Fed had a
recession bias in their statement," said Corey Redfield a strategist at
Piper Jaffray.
"I'm looking for the recovery to start in the first quarter of 2002. I
think federal funds will stay here past the middle of next year."
Investors reacted by briefly pushing the leading Dow share index back
above the 10,000 level.
But the rally was halted following a gloomy trading statement from the
pharmaceutical company Merck, and by the close of trade the Dow ended down
33 points at 9,888.37.
"The statement by the Fed had the market a bit confused. It looks like
things are getting better, but they're hedging their bets," said Edgar
Peters, chief investment officer at PanAgora Asset Management.
"It looks like they are leaning toward either another small cut or not
doing anything."
Recession
Last month the National Bureau of Economic Research, a panel of senior
economists, declared that the US had entered recession in March this year.
The move marked the end of the longest sustained period of growth in
the history of the US economy.
The Fed has tried to counter the slowdown by cutting interest rates to
their lowest levels for 40 years.
Eight of the previous 10 rate cuts the Fed has made this year have been
by half a percentage point.
But analysts say a smaller move should now be sufficient given that the
federal funds rate has fallen so low.
"A quarter-percentage point cut when the fed funds rate was at 6.5% (as
it was at the end of 2000) is relatively small, but a quarter-point cut
when it's down to 2% can have quite a significant impact," said Gary
Thayer, an economist at AG Edwards & Sons, before the Fed's latest cut
was announced.
Mixed signals
Recent data on the US economy has been mixed.
Retail sales appeared to be recovering after its post-11 September
slump, but two reports released on Tuesday sales at stores fell last week.
Last week the latest set of jobless figures showed the unemployment
rate hit a six-year high in November - jumping to 5.7% from 5.4%.
And analysts fear confidence amongst consumers - which seemed to have
been holding up quite well - will start to slip if unemployment continues
to rise.
A report on Tuesday from the National Association of Purchasing
Management (NAPM) said its members saw the US economy growing next year,
but said job prospects remained bleak.
"Economic growth in the United States will resume in 2002," the NAPM
report said.
But it said manufacturers were "less than bullish" about the prospects
for early 2002, and employment was expected to fall by 0.5% over the next
12 months.
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