Greater uncertainty, in part attributable to heightened geopolitical risks, is currently inhibiting spending, production, and employment

US Federal Reserve

The Federal Reserve has reduced interest rates to a 41-year low of 1.25%, a big cut from the previous level of 1.75%.

The Fed said in its statement that "heightened geopolitical risk" was a factor in its decision - a reference to a possible war in Iraq.

Markets were expecting a cut of a quarter percentage point, and the news may lead to a rally on Wall Street - although there was increased concern about the impact of a possible war against Iraq.

The Fed move came as the National Bureau of Economic Research said that it could not be certain that the US economy was yet out of recession.

The news may spark a series of interest rate cuts in the Europe and the UK, where interest rates have also remained on hold for most of the year.

Additional time is needed to be confident about movements of the economy

National Bureau of Economic Research

The newly-elected Republican Congress is expected to pass a business tax cut to help stimulate the US economy.

But with growth in Europe and Japan also weak, it may be some time before the world economy fully recovers.

Economic vitality

In its statement, the Fed said that "greater uncertainty, in part attributable to heightened geopolitical risks, is currently inhibiting spending, production, and employment."

But it warned that this may be the last rate cut for some time to come, adding that it believed that the risks were now "balanced" between the risk of inflation and the risk of further recession as the economy works its way through the current "soft spot."

"This probably reflects just how contentious the meeting must have been," said Wayne Ayers, chief economist at Fleet Boston.

"Some [policy-makers] felt, 'If we have to ease, we should do it decisively. But, in return, we want a statement of balanced risks, [indicating] we've already done a lot, more than we thought we had to do or should do," he added.

Meanwhile, the leading body of economic researchers also warned that there was no certainty that the recession was over.

The NBER said that although "the behaviour of the US economy in the first eight months of the year indicates the decline in activity that began last year may have come to an end..recent data indicates that additional time is needed to be confident about movements of the economy."

In the last 10 days, new data on weak consumer confidence and spending has given the Fed additional reasons to cut rates.

The US economy has been held above water by big-spending consumers, who has splurged on items like new cars using cheap or free credit.

But now that spending is slowing down, rising unemployment may make consumers reluctant to take on more debt.

Many forecasters say economic growth in the current October-December quarter could slow to just a 1% pace, down from a 3.1% growth rate in the third quarter - a warning repeated last week by the US Treasury Secretary Paul O'Neill.