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The US Federal Reserve (Fed) decided on Wednesday to cut the short-term interest rate by 0.25 percentage points, pushing the US federal funds rate down to its lowest level since 1958.
It was the first reduction of US short-term interest rate this year and the 13th cut since the beginning of 2001. The cut showed that the Fed was not satisfied with the economic conditions in the past months and has felt an urgent need to take action now.
When US economic recovery slowed down dramatically at the end of 2002 and at the beginning of this year, many analysts had said the slowdown was caused by the uncertainties arising from a possible US-led war against Iraq. They had predicted that economic recovery would speed up once the war began and the uncertainties dispersed.
Although major combat operations in Iraq ended more than two months ago with a surprising quick victory for the United States, many uncertainties remain around the US economy. Economic recovery in many parts of the country was sluggish in the past two months, the latest survey by the Fed showed.
The government data had drawn an unpleasant picture for the US economy.
Industrial production in US factories, mines and utilities climbed by a small 0.1 percent in May after declining sharply in the previous two months, but it was still down by 0.8 percent compared with the same period in 2002.
Retail sales in the United States grew by a small 0.1 percent in May following a 0.3 percent decline in the previous month.
"Consumer spending remained lackluster overall. Retail sales rebounded as the hostilities in Iraq subsided, but sales remained below the level of a year ago," the Fed survey said earlier this month.
The unemployment rate jumped to 6.1 percent in May, the highest level since July 1994 when the jobless rate was the same 6.1 percent.
The budget deficit of the US government totaled 292.1 billion dollars in the first eight months of the 2003 fiscal year starting from October, 2002, twice the sum for the same period a year earlier. The deficit surpassed the 290 billion dollar record in the whole fiscal year of 1992.
Economists attributed the slow economic recovery in the United States to not only the war in Iraq but also, more importantly, many economic structural problems in the country such as over-expansion at the end of last century and the breakup of stock bubbles a few years ago.
US Fed officials have seen that the risks of not acting appear to outweigh the risks of setting off inflation by flooding the economy with money, the New York Times reported on Tuesday.
Meanwhile, to be vigilant against the occurrence of deflation is another reason behind the Fed's interest rate cut.
Since deflation appears harder to reverse than to prevent, as it happened in Japan, the US Fed was also willing to take an action of "insurance"-- a word Fed Chairman Alan Greenspan has used several times as he talked about deflation. But Greenspan stressed from time to time that deflation is non-existent in the United States.
Undoubtedly, the latest cut of interest rate by the Fed will give some impetus to the US economy, which is already showing signs of acceleration recently, especially at a time when consumer prices are steady at low levels.
However, how quickly will the US economy pick up in the next half of this year remains to be seen and it is unrealistic to be too optimistic as difficulties in the economy cannot be overcome in a short time.
(Xinhua News Agency June 26, 2003)
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