The Federal Reserve has cut US interest rates by a further 0.25 of a percentage point, the seventh successive reduction this year, in a bid to kick-start the ailing US economy.
The Federal Open Market Committee (FOMC) yesterday lowered its target for the federal funds rate to 3.50 percent and made a similar reduction in the largely symbolic discount rate to 3 per cent.
The Fed has now reduced US interest rates by 3 per cent since the beginning of the year with indications that further cuts may be on the cards in the future.
Announcing the rate cut the FOMC said that while the long-term prospects for productivity growth and the economy remained favourable, "the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future."
It stated that household demand has been sustained, but business profits and capital spending continue to weaken while growth internationally is slowing and weighing on the US economy. It added that the associated easing of pressures on labour and product markets is expected to keep inflation contained.
The move had been widely expected, with some analysts suggesting there was a possibility that the Fed could be even more aggressive this time around with a rate cut of the order of 0.5 of a percent.
The markets were also waiting to gauge the Fed's outlook on the pace of a recovery, and a hint of whether another rate cut could be warranted in October.
Shares in New York were weaker following the statement with investors uncertain as to how much longer corporate profits will continue to decline with forecasts showing the worst fall in a decade.
Concerns about falling corporate profits has hit the US stock market with the Standard 7 Poors 500 Index recording its worst six month performance since the start of the Fed's rate cuts this year. It has fallen by more than 8 per cent since January. European shares are expected to open stronger today following the rate cut with analysts suggesting investors will need greater evidence that the Fed's measures are helping to support an economic recovery.
"The market has to see clear evidence that the cuts are feeding into a bottoming out in downgrades to profits and growth expectations. It needs a catalyst.
And this isn't going to be it," according to Merrill Lynch Investment Managers global economist Mr Richard Turnill. The Fed next meets on October 2.
Between now and then the market will be closely scrutinising economic data for more signs of an upturn from leading indicators.
"The market's reaction to the rate cut is mild because this was as expected, but the key thing now is signs of a pick-up in consumer spending and the lagged effect of rate and tax cuts," said Standard Life's head of global strategy Mr Andrew Milligan.
--(Additional reporting by Reuters)
