US Federal Reserve trims rates to 1958 lows

The Federal Reserve on Wednesday trimmed US interest rates a quarter percentage point to 45-year lows, citing recent hopeful economic signs as it offered a less potent growth tonic than markets had hoped.

Repeating its concern about risks of a further fall in inflation, the central bank's Federal Open Market Committee voted 11-1 to lower its bellwether federal funds rate for overnight loans between banks to 1 per cent.

One policy-maker -- San Francisco Fed bank President Robert Parry -- dissented in favor of a bolder cut of a half percentage point. Wall Street analysts had been split on the likely size of the expected reduction and bond prices tumbled on the news that the Fed had opted for a smaller cut.

Economists said policy-makers had at least two reasons for a smaller decrease -- a brightening outlook for second-half growth and a dwindling stock of rate-cutting power.

"Recent signs point to a firming in spending, markedly improved financial conditions and labor and product markets that are stabilizing," the FOMC said in its statement. "The economy, nonetheless, has yet to exhibit sustainable growth."

Disappointment landed hard on stocks and sparked the biggest Treasury bond sell-off in six months. Yields spiked, a trend that could raise costs for such loans as mortgages and undo much of the Fed's intended easing.

A Reuters poll of Wall Street dealers after the Fed move found 16 out of 20 felt the rate cut -- the 13th since January 2001 -- was the last for the foreseeable future. Three thought another reduction was possible at the next FOMC gathering on Aug. 12 and one was unsure but said another cut was possible.

Unhappy Wall Street

Stock prices finished lower. The Dow Jones industrial average closed down 98.32 points, or 1.08 per cent, at 9,011.53 and the tech-laced Nasdaq Composite Index lost 2.98 points, or 0.19 per cent, to finish at 1,602.63.

The Fed said it expected its latest small dose of stimulus will support economic improvement "over time." If it doesn't show up promptly in hard economic data, Fed Chairman Alan Greenspan may face sharp questions when he delivers semi-annual testimony on the economy before Congress next month.

The two-day

meeting, one of only a pair each year, was also intended to help Greenspan prepare for the separate appearances before the Senate and the House of Representatives.

Analysts said with rates so low, policy-makers were running out of scope to influence economic activity through the one lever that they control -- short-term interest rates.

Economist Anthony Chan of Banc One Investment Advisors in Columbus, Ohio, said the Fed wanted to preserve firepower in case its cautious optimism is not borne out soon by concrete evidence of economic rebound and more stimulus is needed.

"There is little doubt that when an individual is besieged by many attackers while holding limited ammunition, each shot is used sparingly to ensure that all those remaining realize the surrounded person has the ability to get the job done," Chan said.

As in its statement following its meeting on May 6, the Fed was sanguine about prospects for future growth even as it voiced worry about the risk of deflation or falling prices.

"On balance, the committee believes that the latter concern is likely to predominate for the foreseeable future."

Recent data have shown the economy is still crawling back from a fairly mild recession in 2001, at a sluggish pace that has pushed the unemployment rate to above 6 per cent from under 4 per cent late in 2000.

Gross domestic product has expanded at around a 2 per cent annual rate, well under the 3-to-3.5 per cent pace seen as the US economy's long-term potential for growth.

The single bright spot -- largely stemming from low interest rates -- has been housing. Other key sectors like manufacturing have been in the doldrums.

Fresh economic data on Wednesday confirmed these trends.

The Commerce Department said sales of new single-family homes jumped 12.5 per cent last month to a record annual clip of 1.157 million units. Meanwhile, the private National Association of Realtors said sales of previously owned homes rose 1.2 per cent in May to 5.92 million units.

On the other side of the ledger, orders for costly durable goods unexpectedly sank for a second straight month, falling 0.3 per cent in May after a 2.4 per cent plunge in April.