THE US Federal Reserve is expected to cut US interest rates again this week in a bid to avert what many now fear may be a severe downturn in the US economy.
Another rates cut could put real interest rates below zero and is being contemplated amid fears of the effect of the cuts on US inflation.
US treasury secretary Henry Paulson yesterday gave a series of TV and media interviews where he defended the bailout last week of the 85-year- old firm of Bear Stearns, the fifth-largest securities firm in the US.
Bear Stearns was yesterday believed to be seeking to agree a deal to sell itself to JPMorgan Chase, amid growing concerns that failure to clinch an agreement by this morning could put other banks under severe strain.
"The government is prepared to do what it takes to maintain the stability of our financial system," Mr Paulson said. He said the risks to financial stability far outweighed the so-called "moral hazard" in which investors came to expect government rescues. He refused to say what a growing number of US economists have concluded, that the US economy has entered a recession.
A number of major US financial institutions are to publish first- quarter figures today that are expected to include fresh losses and write-downs of billions of dollars arising from the US subprime and credit crunch crisis.
Goldman Sachs is expected to reveal write-downs of more than $1 billion (€642,000 million). Lehman Brothers is expected to reveal write-downs of $1 billion and Morgan Stanley further write-downs of $500 million, according to some reports.
Total write-downs from subprime securities are now expected to rise to $285 billion, according to a new report from Standard & Poor's. However, the US administration is resisting calls to implement measures to assist struggling homeowners.
In his weekly radio address on Saturday, President George Bush said he would not be stampeded into making bad policy decisions.
"The market now is in the process of correcting itself and delaying that correction would only prolong the problem." Mr Bush, who is to meet his top policy advisers today, said: "We can be confident that our economy will continue to grow but, in the short run, it is clear that growth has slowed."
The US Federal Reserve has cut rates by a cumulative 2¼ percentage points, to 3 per cent, since September. The cuts have driven the dollar to a new low, thereby increasing the cost of exports from Ireland to the US. They have also caused some observers to warn about the possible inflationary effects on the US economy.
"Conditions have the potential to supercharge the increasingly visible self-feeding downturn in the real economy," said Citigroup economist Robert DiClemente.
The housing crisis and a softening labour market in the US have moved the economy ahead of the Iraq war as the top concern of voters.
Continued market turmoil and a protracted downturn could bode ill for the presumptive Republican nominee, John McCain, whom Democrats have sought to associate with the economic policies of Mr Bush.
- (Additional reporting Financial Times, Bloomberg, Reuters)
