US rate cut 'may not go far enough'

The US Federal Reserve’s surprise interest rate cut may not be enough to prevent the world’s largest economy from falling into recession, experts warned today.

The policymakers’ move – a week earlier than expected – came amid stock market turmoil around the world as concerns over the health of the US economy mounted.

Rob Carnell, ING Bank’s chief international economist, said: “The US looks as if it is heading into a very severe slowdown. It is going to get worse as well - we are clearly not at the bottom.”

The Fed has taken a “perfectly appropriate step” given the risks but may not have gone far enough, Mr Carnell added.

“The truth is the Fed don’t know how bad this is going to be but they are prepared to act aggressively to see off the worst of it.

“We are predicting US growth of around 1.6% this year but this could easily fall to around 1%. The population increases by 1% a year so this would mean GDP growth per head stagnating.”

The Fed’s statement warned that “appreciable downside risks to growth remain”. It comes after a welter of dire economic indicators over the past month – including plunging retail sales and new housing starts in December.

Financial giants such as Citigroup – the world’s biggest bank – have also unveiled a fresh round of multi-billion losses from the crisis in US sub-prime mortgages.

Investec’s chief economist Philip Shaw said policymakers were likely to follow today’s move with a further cut next week.

Mr Shaw said: “Clearly the Fed is very concerned over the downside risk to the economy – we suspect that the housing market remains at the forefront of their thinking.

“Whether today is too little, too late only time will tell but we are likely to see rates continue to come down – possibly by another 0.5% next week.”

The Bank of England is unlikely to follow the US with emergency rate cuts, Mr Shaw added: “This is largely a US phenomenon – the problems in the mortgage market do not apply to the same degree in the domestic economy and there is little justification for rate cuts on this scale.”

Dr Alistair Milne, banking expert at the Cass Business School said the Fed “was doing what they can to restore calm to the markets”.

But he warned: “The outlook going forward – the next 15 years – is for much slower growth of output and demand in the UK, US, Australia, Spain, Ireland and other countries.”


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