Fed cuts rates, hints at a pause

The Federal Reserve on Wednesday cut interest rates by a quarter point to 2 per cent and hinted at a likely pause at its next policy meeting in June.

However, the US central bank was careful not to suggest that it thinks the rate-cutting cycle is necessarily over, and left open the option of cutting rates in June, or resuming rate cuts later in the year if required.

The Fed decision followed new data that suggest that the US economy grew 0.6 per cent in the first three months of this year, avoiding outright contraction due to a build-up in business inventories and continued support from exports.

But real final sales (excluding inventories) declined as investment fell and consumption slowed, suggesting that underlying demand may not be enough to support continued expansion.

The report revived the debate as to whether the US is in recession.

Richard Yamarone, director of research at Argus Securities, said "claiming recession while economic output is expanding is like diagnosing a patient with the sniffles as having pneumonia".

But John Ryding, chief US economist at Bear Stearns, said "the fact that there was technical growth in GDP in no way alters our view that the economy has fallen into recession".

The official verdict will be made by the National Bureau of Economic Research. It puts "considerable weight" on GDP, but uses measures such as employment and income as well.

Many analysts believe the economy will probably contract in the second quarter as companies cut back on inventory.

"The increase in inventories is likely unintentional: corporations were seemingly surprised by the cooling off in demand," said Drew Matus, senior economist at Lehman Brothers.

However, others argue that tax rebates will arrive just in time to boost consumer spending and keep second-quarter growth positive too.

Carlos Gutierrez, the US commerce secretary, said the report suggests growth will be "slower but positive" in the first half.

Real personal consumption increased at a 1 per cent rate in the first quarter — still positive, but the weakest growth since the second quarter of 2001.