The US Federal Reserve cut interest rates last week for the third time this year. The half percentag...
The US Federal Reserve cut interest rates last week for the third time this year. The half percentage point reduction followed two cuts totalling one basis point in January and dropped the Federal funds overnight bank lending rate to 5%, its lowest level since mid-1999.
Fed officials said falling stocks, a slump in US manufacturing and the slowing global economy had all contributed to the decision to reduce rates further. Observers see this latest move as a signal that the Fed will do more to revitalise the ailing economy if necessary and it did leave the door open for another rate cut before the next meeting in May.
Meanwhile, as the Fed was announcing this news, the US stock market was taking yet another battering. On 20 March, three of the major US indices, including the Dow Jones Industrial Average, fell by up to 4.8%, and around 400 US stocks are now trading at their lowest points for the past year.
Despite such a bleak picture, many US managers believe the Fed's rate cutting will be enough to re-ignite the economy. Following the second rate cut in January, the Dow Jones Industrial Average rose quickly while the technology-biased Nasdaq Index edged higher.
The latest cut is an indication Fed chairman Alan Greenspan is still sensitive to what the market expects, according to fund managers. Most feel that the general US outlook is positive, income growth is strong and unemployment is low, but manufacturing is in trouble and consumer confidence is weak.
"Greenspan will do whatever it takes to ensure the economy grows," says Alex Ingham, a US fund manager at Aberdeen Asset Management. "We are expecting to see a 0% growth rate for the first quarter and there may be a short recession, but we feel the chances of a full recession are less than 50%."
Many other commentators also believe the US will avoid full recession and expect stocks to begin to rally in the second half of the year as the benefits of lower borrowing costs trickle down to consumers. "The economy will pick up in the third quarter," says William Calvet, a US fund manager at Framlington. "The consumer balance sheet is currently in good shape."
Companies have had trouble growing profits and revenues, however, as the economy has slowed. US gross domestic product increased at its slowest pace in five years during the last three months of 2000, while consumer confidence dropped to its weakest levels in four years. Lucent Technologies, Amazon.com and AOL Time Warner all announced redundancies in January.
But, according to Cormac Weldon, US fund manager at Threadneedle, Alan Greenspan and George Bush can provide stimulus to the economy without fearing inflationary consequences. He says: "They will cut rates as they see fit and Congress will be able to cut taxes that will boost the economy. We could see earnings growth in the region of 5% and the S&P 500 Index could rise 10% to 12% this year."
Weldon is expecting growth in the first half of the year of about 1%, while gross domestic product growth for the year is expected to be between 2% and 2.5%. He says the recent rate cuts are spurring the economy, while housing activity is looking extremely positive.
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