January 31, 2008 | posted by Michael Baxter in US economy |

And so the Fed duly obliged yesterday. In cutting the rate of interest by half a per cent, just a week or so after its last cut, it has certainly been the case that this January has seen the Fed try its best to ease the pain of this darkest of winter months.

And now the US rate of interest is 3 per cent. Until the beginning of last September, the US rate of interest was still at the relatively high level of 5.25 per cent - and no one was predicting such sharp cuts in rates - although in fairness, even as far back as 2006, Capital Economics had said the seriousness of an impending slowdown in the US housing market had been underestimated, and it had predicted substantial falls in US interest rates in the years ahead. Although, not even it foresaw quite such rapid cuts in rates.

The Fed’s remarkable run of rate slashing kicked off last September with a half a per cent cut. October and December both saw quarter of a per cent falls, but January takes the biscuit, with the Fed’s official discount rate falling by 1.25 percent in the month.

But, it seems the rate cutting is still not at an end, with many pundits predicting at least one, maybe two more quarter of per cent cuts.

Of course, with the rate of interest that low, all those borrowers who are currently struggling to make ends meet will suddenly find themselves a lot better off. Couple this with George W’s $150bn tax break, currently winging its way through the US political system, and then throw in Ben’s fleet of helicopters carrying fresh and glittering new money, and there can be no denying the US is doing what it can to keep the US economic machine ticking over.

Whether it is a such a sound practice to kick-start the US by trying to boost consumers, when it was their spending that created the mess in the first place, is a moot point, but setting aside that argument, will this line up of aggressive action work?

Well, one things seems sure, the dollar must surely have further to fall - although maybe not against the pound. With a cheap dollar, of course, the price of goods imported to the US, measured in dollars, will soar. The danger has to be that that the falling dollar will, in effect, counteract the benefits of the monetary and fiscal stimulus, and US inflation will soar.

It is also debatable whether the US, with its funds already strapped, and with the need to find another $150bn, will be able to continue to afford, how can we put it, proactive foreign policy, when the dollar is losing so much of its clout.

As for the here and now. Yesterday also saw the release of the first set of data relating to US growth in the last quarter of last year. The economy expanded at an annualised rate of just 0.6 per cent, from the last quarter of 2007 - or so says the first draft of the official statistics.

Now think about that, if the annualised rate is 0.6 per cent, then the quarterly growth must be around 0.15 per cent. By contrast, the UK expanded by 0.6 per cent in its final quarter - so says the ONS data.

Furthermore, the consensus expectation had been for 1.2 per cent annualised growth in the US, even Capital Economics, arch bears, predicted 0.8 per cent annualised growth.

Now, US figures are compiled differently from the UK’s. Less emphasis is placed on the quarter on quarter figures, rather, instead, emphasis is placed on the annualised data. So US growth only needs to slow by a tiny amount and it could be argued the it is in recession.

There’s lies, damned lies and statistics. But it appears that those who are saying the US is already in recession, might, at least by one definition, be telling the whole truth.