The US Federal Reserve yesterday cut short-term interest rates by a quarter of a percentage point, bringing them down to the lowest level since Dwight D. Eisenhower was president, writes Conor O'Clery from Washington.
The Fed's policy-making committee voted 11-1 in favour and gave a strong indication that it will keep rates low for some time to come.
The move was widely expected to assure the markets that the central bank would do whatever was necessary to ward off deflation while energising consumer spending and business investment.
The US economy had "yet to exhibit sustainable growth", the Fed said in a statement after a two-day meeting in Washington. "The committee judged that a slightly more expansive monetary policy would add further support for an economy which it expects to improve over time."
It noted recent indications of firmer spending, improved financial conditions and a steadier job market.
The lone dissenter was Mr Robert Parry, president of the San Francisco Federal Bank, who voted for a half-point cut.
Yesterday's move brings the short-term inter-bank lending rate in the US down to 1 per cent, its lowest level since 1958, when the economy was heading for deflation.
The Fed's efforts to kick-start the US economy will have a crucial bearing on growth prospects for the Republic. Government forecasts of a recovery moving into 2004 are based on expectations of an international upturn and, with growth prospects looking poor for the euro zone, the US is likely to lead any such revival.
The Irish economy also relies on the US as its second-largest export market and its main source of inward investment.
The performance of the US economy will have a key impact on the dollar exchange rate. The dollar made some gains yesterday after the rate-cut announcement, as the cut limited the differential with European rates, but some analysts still expect the recent downward trend of the US currency to resume, which would put further pressure on Irish exporters.
The last cut in US interest rates was in November 2002, when the rate was reduced to a 41-year low of 1.25 per cent. After the Iraq war in May, the central bank left rates unchanged, but it warned that the economy was showing signs of weakness.
This time the Fed again expressed slight concerns about falling inflation leading to deflation - where falling prices lead to lower wages and growing debt. "The probability, though minor, of an unwelcome substantial fall in inflation exceeds that of a pick-up in inflation from its already low level," the statement said.
Although the chairman of the Fed, Mr Alan Greenspan, said that the risk of deflation was remote, the central bankers are determined to prevent a downward spiral in prices which could plunge the economy into recession.
The Fed also said that the upside and downside risks to the attainment of sustainable growth would be equal in the next few quarters.
US stocks fell after the announcement as investors expressed their disappointment with the decision to limit the cut to just a quarter of a percentage point. Investors were also rattled by the Fed's warning of possible deflation.
Commercial banks in the US are expected to cut their prime lending rates for consumer and small-business loans by a quarter-point, from 4.25 per cent to 4 per cent, the lowest level since 1959.
Analysts said that the message from the Fed was that the economy was on a level course, that economic performance could improve in the coming months and that the cut would give a helpful nudge.