bbc

Tuesday, 21 August, 2001, 18:27 GMT 19:27 UK Fed cuts US rates for seventh time

The US Federal Reserve has cut interest rates for the seventh time this year in a continued attempt to revive the US economy.

The Fed cut the main Federal Funds rate by a quarter point to 3.5%.

The move was widely expected as recent economic data has shown the US economy remaining sluggish and company profits still falling.

The Fed said it saw excessive weakness as the main threat to the economy rather than inflation and indicated it was prepared to take further action if necessary.

Rate cut expected

A rate cut was seen as a near certainty after the Fed published its 'Beige Book' survey of regional economic conditions earlier this month.

The report showed the weakness in the manufacturing sector was now spreading across all areas of the US economy.

Even consumer spending - which had remained relatively buoyant - was seen as slowing, with retail sales "sluggish and frequently below expectations".

Provisional growth figures for the second quarter showed the US economy growing at an annual rate of 0.7%.

But there is now a worry that the revised figures due next week could show that the US economy either failed to grow at all, or contracted.

Last week's trade figures which showed both exports and imports falling during July have added to these fears.

Seventh cut this year

The latest rate reduction is seventh cut by the US Federal Reserve this year

The Federal Funds rate, the amount banks charge one another for overnight loans, is now at its lowest level since February 1994 when it stood at 3.25%.

At the start of 2001, the Federal Funds rate stood at 6.5%.

There then followed five half point cuts, and at its June meeting the Fed decided to reduce the rate by a quarter point to 3.75%.

A clue to the latest rate cut came last month when the Fed's chairman Alan Greenspan gave a downbeat analysis of the economy in a speech to the US Congress.

"Pressures on profit margins have been unrelenting... weakness is evident across the board," he said.

Market gloom

The series of rate cuts by the Fed have had little impact on US stocks.

Since the start of the year, the Dow Jones Industrial Average has fallen 5%, while the Nasdaq Composite, which contains many technology stocks, is down nearly 25%.

A quick turnaround in the US economy has failed to materialise, and the market has had to endure a series of profits warnings and job cuts from major US companies.

Growth in Europe has also slowed to the disappointment of those who thought the region could escape the worst of the downturn and help offset the effects of the US economic problems.

-- Anonymous, August 21, 2001

Answers

I just don't get it. Seems to me that the past few times he has cut the interest rates, the stocks take a fall. Earlier today, it was in the green. I just looked and it is in the red.

Can someone please explain the "why" to me on that one?

-- Anonymous, August 21, 2001

I think each time they expected a full hal percent cut and the drop shows their disappointment. But I'm nowhere near being expert on this stuff.

-- Anonymous, August 21, 2001

OG,

I hear ya! Three of my four retirement accounts are tied up in stocks one way or another, and there is nothing that I can do about it. :( Each time that they do this, I take a severe beating. I wish they would just put my retirement into CD's, but NOOOOooooo they want it to be blown away.

-- Anonymous, August 21, 2001

Sheeple, an anticipated rise or fall tends to have been factored into the market quite a while before it actually happens, so the market is just reacting to any differential in what was expected. Sort of like the company earnings reports. Or maybe to something else entirely.

-- Anonymous, August 21, 2001

CBSMarketWatch had the following comment..."Investors engage in tradition of buying the rumor and selling the news".

-- Anonymous, August 21, 2001

Keep in mind that the rate cuts are really only a psychological ploy at this time. Japan tried cutting rates as well in order to get their own economy going again. No luck. Their rates have been sitting at less than 1%, actually barely above 0%, for a long time now.

The point is that folks/businesses just don't increase borrowing due to interest rates alone. They have to believe they will be able to pay off the loan from income and when the economy looks glum they don't have any incentive to increase borrowing regardless of the rate.

-- Anonymous, August 21, 2001