The US Federal Reserve has cut interest rates in a dramatic effort to head off a possible recession. US equity markets rallied immediately and European markets are expected to follow this morning.
The surprise half percentage point cut came between regular meetings of the US central bank for the first time since the Asian economic crisis, indicating that the bank felt it had to move quickly.
Following the Fed's meeting in December, its chairman, Mr Alan Greenspan, spoke about a possible US recession. Policymakers are determined to head this off and yesterday's move boosted equity markets and the dollar. The Nasdaq, dominated by high-technology shares, surged ahead by 14.1 per cent, the largest one day gain in its 30-year history and this is sure to boost European markets this morning.
The President-elect , Mr George W. Bush, welcomed the decision, which he said was a "bold step" needed to support the economy. He added that his proposed package of tax cuts was also needed to support growth.
The interest rate cut is expected to be the first in a series, with US rates - now 6 per cent - forecast to end the year at around 4.75 per cent. The Fed hopes this will result in a recovery in the economy by the second half of the year, although economists said that the outlook for the US remained uncertain.
The euro fell back slightly to just below $0.94 after the announcement, having traded as high as $0.9571 during the day, its strongest level since July 6th.
US equity markets recovered their heavy losses of Tuesday. As well as the Nasdaq rise, mainstream stocks were also boosted and the Dow Jones index closed 2.81 per cent higher.
The cut in US interest rates will increase pressure on the European Central Bank to lower its interest rates, but a rapid cut is unlikely, according to economists in London and Frankfurt.
They said the ECB was unlikely to act at today's governing council meeting, but a cut in the first quarter or early in the second quarter now seemed more plausible.
Analysts said the ECB's reaction would hinge at least partly on the currency market. They argued that a sharp fall in the value of the dollar against the euro would give the ECB more leeway to reduce rates, as a further surge in the euro would effectively tighten European monetary conditions.
Before the rates announcement a senior Department of Finance official was sanguine about the US economic slowdown, saying it had as many positives as negatives for Ireland.
Following publication of the 2000 Exchequer returns, the second secretary at the Department, Mr Cathal O'Loghlin, said the impact of the US slowdown may have been overrated.
"US multinationals operating here are primarily addressing European and Near East markets. The primary danger to us is the way the markets develop in Europe."
According to Mr O'Loghlin, downward movement in the dollar will help the US economy by boosting the competitiveness of its exporters.
The Department of Finance is predicting continuing Exchequer surpluses over the next few years.
Yesterday, official returns showed that strong tax revenues have led to an overall Exchequer surplus in revenue over spending of £2.4 billion. This is the highest surplus yet recorded.