U.S. Fed cuts interest rates

The Fed cut the overnight rate for federal funds to banks by 0.5 per cent to 6 per cent. It also cut the discount rate by 0.25 per cent to 5.75 per cent.

The decision-making Federal Open Market Committee took the action in a move coming well before the body was scheduled to meet on January 30. It normally only announces interest changes at the regular meetings.

The committee left rates unchanged during its December 19 meeting but said it would "monitor closely the evolving economic situation" and indicated a new bias towards tightening interest rates in the future.

The Dow Jones Industrial Average jumped more than 250 points after the Fed announcement. The recently beaten down Nasdaq Composite Index was up more than 11 per cent in frenzied afternoon trading.

The Fed said the action was taken "in light of further weakening of sales and production, and in the context of lower consumer confidence, tight conditions in some segments of financial markets, and high energy prices sapping household and business purchasing power".

"The Committee continues to believe that, against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future," the Fed statement said.

But the Fed board said there were no concerns of increasing inflationary pressures and it pointed out that technological advances would continue to provide opportunities for gains in productivity.

The last time the Fed dropped interest rates was in 1998. It last raised the rates in May 2000, the last of a series of hikes to slow down the economy.

U.S. gross domestic product growth dropped to 2.2 per cent in the third quarter of last year, down significantly from the 5.6 per cent pace it had set in the second quarter.

Industrial production fell in October and November for the first two-month decline since 1998. And a key indicator of factory activity showed that manufacturing in December slowed to its lowest level since the 1991 recession.

Wall Street has been mired in a slump since August as leading technology and industrial companies released disappointing earnings reports. Technology stocks continued to decline Tuesday, pushing the Nasdaq index to its seventh biggest one-day loss.

Stock analysts had expected the Fed to lower rates at its committee meeting later in the month and to continue dropping rates during the spring.

"This is a real shocker in terms of the timing," an analyst with Raymond James & Associates told Bloomberg News. "Many people thought they would move between meetings, but that they would wait until after the employment numbers."

(kil/dpa)