Fed's quarter-point rate cut calms US market jitters

DIANE COYLE

Economics Correspondent

The US Federal Reserve yesterday cut interest rates by a quarter point, calming Wall Street which had braced itself for more turmoil in the equity and bond markets.

The Fed funds rate came down to 5.5 per cent, but the discount rate was left unchanged at 5.25 per cent. The news came after Monday's 100-point fall in the Dow Jones index - the biggest one-day drop for more than four years.

In London, the FT-SE 100 index rallied after losing 37.6 points at one stage to close down 19.2 at 3,576.9. This made its loss over two days 65.7 points.

Wall Street's fright was due to fears that the US budget row had reduced the chance of a rate cut after yesterday's meeting. But yesterday bargain- hunters helped share prices to steady before the Federal Reserve's meeting - despite a snowstorm that sent many Wall Street traders home early. The rate cut reversed a near-24-point fall in the Dow Jones industrial index, leaving it up 4.34 at 5,079.55 by mid-afternoon.

The fortunes of dollar and sterling were mixed during the day, but the pound ended more than a pfennig higher against the German mark at DM2.2160.

Before the Fed meeting, Wall Street analysts were evenly divided about whether or not it would cut its key interest rate. Apart from differences of view about the state of the economy, many thought the central bank would wait for more progress towards a resolution of the budget wrangle between the President and Congress before making a move.

President Clinton said yesterday he was "not especially" worried about the financial market reactions to the budget row.

The second shut-down of the US government in just over a month started at the weekend. Mr Clinton met Congressional leaders for further talks yesterday, but officials said the deadlock over tax and spending plans was unlikely to be broken quickly.

Official figures on the US economy in the third quarter, due to have been released yesterday, were delayed into the new year by the Federal government's closure. This made an optimistic forecast for growth in 1996 from the Conference Board the main economic news.

The employers' organisation said the Fed had already stimulated the economy as long-term interest rates had fallen in anticipation of cuts in its short-term policy rates. A revival of growth could make inflation pick up next year. Gail Fosler, chief economist, said there was little in recent economic data to support a cut in interest rates by the Fed. Her comments followed similarly cautious advice from the OECD's chief economist, Kumiharu Shigehara, speaking about the organisation's new economic forecasts yesterday. ''I would vote for caution,'' he said.

Frank Pusateri, an analyst at Mellon Bank in Pittsburgh, said: ''There is a good case to be made for waiting for this budget situation to be resolved.''

However, many financial market economists believe the flagging economy and low inflation justify a fall in the cost of borrowing. Ian Harwood of Kleinwort Benson said: ''The economy is not staring recession in the face but the outlook is drab and there is no interruption of the trend towards lower inflation.''