US unveils new cut in interest rate

THE UNITED STATES Federal Reserve surprised and relieved Wall Street last night with its second interest-rate cut in a month, reducing both the prime and the discount rates by 0.25 of a percentage point. The Dow Jones Industrial Average responded with a 332-point, or 4 per cent, rise in the last hour of trading.

The cut in discount rates was the first change since January 1996, and the first cut since July 1992. The Federal Reserve cited "growing caution by lenders and unsettled conditions in financial markets" as the reasons for its decision. US mortgage rates had started to rise in the past two weeks as lenders anticipated a squeeze on credit.

In a departure from usual practice, the Federal Reserve announced yesterday's adjustment in rates outside the framework of the six-weekly board meetings.

The normally gnomic chairman, Alan Greenspan, had warned international bankers and financiers at last week'sannual meetings of the World Bank and International Monetary Fund (IMF) in Washington of a "fear-induced psychological response" to crises in Asia and Russia by international markets.

The 0.25 point cut in the short-term interest rate on 29 September had failed to cheer the markets, which continued to fall. The speed with which share prices rose on yesterday's news indicated that this was more in line with what they had hoped for.

The cut in rates was the second piece of good news for the markets yesterday, as the US Congress and the White House had earlier announced that agreement had been reached on the 1999 budget - including the freeing of the $18bn contribution to the IMF, which had been held hostage to inter-party wrangling.

With mid-term elections less than a month away, neither Democrats nor Republicans wanted to be held responsible for obstructing the agreement, and President Bill Clinton and party leaders professed equal satisfaction with the deal.

Bank of England hopes,

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