KEY POINTS:
The Federal Reserve delivered another quarter-point cut in US interest rates yesterday and declined an opportunity to signal that its dramatic period of monetary easing is over.
The decision came within hours of data showing that the US economy continued to grow in the first three months of the year, defying predictions that it has entered a recession, but the Fed's open market committee, the FOMC, said that the credit crisis continued to be a drag.
US stocks fell after the announcement because of a lack of clarity in the Fed's statement about its future plans.
Cutting its main federal funds rate target to 2 per cent, the FOMC said: "Economic activity remains weak. Household and business spending has been subdued and labour markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth."
Two FOMC members dissented, arguing that rates should be held steady to prevent inflation from racing higher. Financial markets had anticipated a cut, however, and were largely unmoved.
Investors immediately began the close textual analysis always required by an FOMC statement. The initial reaction was that the statement was not as hawkish on inflation as anticipated, repeating that the Fed expected prices, even of fuel and food, to moderate as the year progresses.
The market had also expected a clearer hint that the Fed would now pause its series of interest rate cuts, which have brought the federal funds rate target down from 5.25 per cent when the credit crisis erupted. The FOMC did, however, note the "substantial easing" of monetary policy that it has already delivered, and dropped a line from the previous statement that noted "downside risks" to the economy.
The Fed has eight weeks until its next meeting, before when tax rebates will be mailed to millions in a US$150 billion ($191 billion) Government attempt to encourage spending and boost the economy.
Many economists said the Fed had effectively moved to a neutral bias on the future direction of rates, but not everyone agreed. Steven Butler, head of foreign exchange trading at Scotia Bank in Toronto, said: "It's way too soon to say they are done."
There were also mixed reactions to yesterday's GDP figures, the first estimate of economic growth in the quarter ended 31 March. That came in at 0.6 per cent, sluggish but ahead of Wall St's expectations. A 5.5 per cent growth in exports, largely fuelled by the weak dollar, helped to offset big drops in housing-related growth and in manufacturing and a new slowdown in commercial construction.
GDP growth would have been negative had it not been for a build-up in inventories, an extra US$1.8 billion of stockpiled goods yet to feed through the economy.
Kevin Logan, senior US economist at Dresdner Kleinwort in New York, said: "What that suggests is that we will see a draw-down of inventories in the current quarter that will act as a drag on GDP."
The Fed's failure to deliver an unequivocal statement that the worst was over for the economy caused investors to sell their best performers in the recent rally, led by tech stocks Apple and Research in Motion. Stocks had risen early in the day after quarterly results from blue chips General Motors Corp and Procter & Gamble topped Wall St expectations and the release of the economic data.
But the three major indexes shed their gains after the release of the Fed's statement, which left the outlook for further cuts clouded.
The Dow Jones industrial average finished down 11.81 points, or 0.09 per cent, at 12,820.13. The Standard & Poor's 500 Index fell 5.35 points, or 0.38 per cent, at 1,385.59. The Nasdaq Composite Index was down 13.30 points, or 0.55 per cent, at 2,412.80.
No recession yet
* Economic data shows US GDP grew by 0.6 per cent in the March quarter.
* The US Federal Reserve cuts interest rates from 2.25 per cent to 2 per cent.
* US stocks drop with the Dow Jones down 0.9 per cent and the S&P 500 down 0.38 per cent.
- INDEPENDENT
Paulson supports rate cuts but won't comment on recession
US Treasury Secretary Henry Paulson said he was supportive of the Federal Reserve's interest rate cuts, adding he believes the weak economy will recover and the US dollar's value will eventually reflect better long-term prospects.
"I've got confidence in the Fed and I've been very supportive of what the Fed has done and what the Fed is doing," Paulson said after the Fed lowered its key interest rate by a quarter-percentage point to 2.0 per cent.
"As you've heard me say many times, I'm a strong dollar man, we have a strong dollar policy and although our economy, which has got some ups and downs, is going through a rough patch right now, I think our long-term economic fundamentals compare very favourably when I look around the world and I think they're going to be reflected in the value of our currency," he said. Paulson also said that data showing better-than-expected gross domestic product growth of 0.6 per cent in the first quarter did not alter his view that the economy has slowed significantly and faces headwinds from high energy and food prices, a housing slump and financial markets turmoil.
He declined to say whether the United States would experience a recession.
- REUTERS
