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U.S. Cuts Interest Rates To Jumpstart Economy
WASHINGTON, Aug 21 (News Agencies) - U.S. Federal Reserve policymakers, fighting to pump life into the stubbornly idle U.S. economy, sliced a quarter point off key interest rates Tuesday in their seventh cut of the year.
Members of the Federal Open Market Committee (FOMC) trimmed the benchmark federal funds rate by 25 basis points to 3.50%, three percentage points below the rate at the start of this year.
They also cut the largely symbolic discount point by a quarter point to 3.0%.
Long-term prospects for productivity growth and the economy remained favorable, the policy-making FOMC said in a statement.
But "the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future," it added, opening the door to another easing in October.
Business investment was dragging down the U.S. economy, the Federal Reserve policymakers said.
"Household demand has been sustained, but business profits and capital spending continue to weaken and growth abroad is slowing, weighing on the U.S. economy," they said in the statement.
But the easing of pressures on labor and product markets was expected to keep inflation contained.
Markets had been banking on a rate cut to soothe mounting fears over the U.S. economic outlook.
U.S. economic growth, hampered by falling business investment amid carnage in the high technology sector, stalled to a mere 0.7% in the second quarter.
That figure may even be revised lower this month, possibly showing a contraction, analysts say.
Vital signs for the economy are now mixed.
U.S. manufacturers held output steady in July, ending nine months of falling production.
A closely watched barometer of future activity, the leading index compiled by the private Conference Board, rose for the fourth straight month in the same month.
But share prices remain weak. The technology-heavy Nasdaq index has dropped about nine percent since rates were last cut June 27th.
And the Federal Reserve's latest Beige Book report said a decline in manufacturing activity began to spread into other areas of the economy in June and July.
Some analysts question, however, how effective interest rate cuts will be in boosting growth.
"The question that is increasingly being asked is: Where's the beef?" said a report by Commerzbank economist Patrick Franke.
"In other words, when will the expansionary effect of all this monetary easing finally begin to show up in the real economy?"
While optimists could pin their hopes on a jump in money supply growth in the first half of this year, pessimists could wallow in decelerating consumer credit and sluggish equity markets, he said.
U.S. President George W. Bush's $1.35 billion tax cut initiative - expected to inject $40 billion in tax rebates into people' pockets in the current quarter - and the prospect of an end to falling inventories, are eventually expected to boost growth, however.
For their part, U.S. business leaders welcomed the interest rate cut.
"Combined with this year's tax rebates, the most recent rate cut is an insurance policy against further weakening in the economy," U.S. Chamber of Commerce chief economist Martin Regalia said in a statement.
"As important as the rate cut itself, the Fed's decision to maintain its economic growth bias is a clear expression of its willingness to cut rates further if necessary to get the economy moving," Regalia said.
Federal Reserve interest rate cuts had so far staved off recession while failing to trigger a rebound, Regalia said.
"With consumers continuing to spend, housing markets remaining strong and businesses drawing down inventories, the economy should be poised for a turnaround by the end of the year," she forecast.
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