US rates 'heading for 2.5% by the spring'

Published on Tuesday 22 January 2008 20:55

AMERICAN interest rates are set to tumble as low as 2.5 per cent by early spring as US policymakers battle to restore stability to a faltering economy.

Economists said they expected the Federal Reserve to have shaved another full point off borrowing costs by its scheduled April meeting.

The prediction came after yesterday's surprise three-quarter-point cut to 3.5 per cent – a move that appeared to have only limited success in restoring investor confidence.

Despite clawing its way back from an initial 460-point plunge, the key Dow Jones industrials index still finished lower by 128 points, or 1.1 per cent, at 11,971.19.

Bonds jumped sharply, with two-year notes falling to their lowest in nearly four years, as investors prepared for still more rate- cutting.

In London, the benchmark FTSE 100 index of Britain's biggest companies closed 161.9 points or nearly 3 per cent higher at 5,740.1 following a rollercoaster session and the previous day's 323-point battering.

Nigel Gault, chief US economist at forecasting body Global Insight, said the prospect of "at least a mild US recession" suggested the Fed was "far from done cutting rates".

He added: "We now expect the Fed to cut another cumulative 100 basis points off interest rates. The next instalment will probably come at the formal meeting on 30 January – another 25 or 50 basis points. We would expect to hit 2.5 per cent by the April meeting."

Yesterday's decision to slash interest rates came a week before the US central bank's regularly scheduled meeting, a sign that it acknowledges that the global financial situation is serious.

David Jones, chief economist at DMJ Advisors, said the Fed could move again between meetings, should conditions deteriorate further, and predicted the Fed would lower interest rates to 3 per cent by the end of March.

Earlier this month, leading investment bank Merrill Lynch said the US economy was already in recession.

Some analysts pointed to a panic move by the Fed, which is headed by chairman Ben Bernanke. Michael Metz, chief investment strategist at Oppenheimer in New York, said: "Unfortunately the Fed] have no power to reverse what in my opinion is the worst post-war recession."

The Bank of England, which is likely to come under hightened pressure from business leaders and retailers to cut interest rates on this side of the Atlantic, said it had no plans to bring its scheduled 6-7 February rate- setting meeting forward after the US move.

Despite the UK market rebounding and Wall Street hauling itself back from the abyss, analysts warned of further turmoil.

Neil Parker, market strategist at Royal Bank of Scotland, said: "Rather than instilling confidence into the markets, I think it will just throw in more panic, so we'll get a short-term rally, following which most of the equity markets are going to get an absolute hosing again."

The reduction in the federal funds rate from 4.25 per cent down to 3.5 per cent marked the biggest reduction in this target rate for overnight loans on records going back to 1990. It also marked the first time that the Fed has changed rates between meetings since 2001.

On Friday, US president George Bush unveiled plans for a 70 billion package of temporary tax cuts and other measures in a bid to kick-start the US economy.