Goldman warns of 1% US rates
GROWING fears that the US is slipping back into recession gripped Wall Street on Friday sending share prices tumbling and government bonds soaring. A big drop in factory orders and evidence of sluggish jobs growth raised expectations that the Federal Reserve may cut interest rates again to ensure economic growth.
Top American investment bank Goldman Sachs added fuel to flames by predicting a 75-basis point cut in official interest rates - to just 1% - by the end of the year. The Fed funds rate currently stands at a 40-year low of 1.75%.
Goldman had previously predicted no move in rates this year and no tightening until the third quarter of next year. Its economists do not believe the US will fall into a double-dip recession, but Fed officials have probably been surprised by the recent weakness in economic-data and will want to take out more insurance against that possibility.
Last week US data turned distinctly ugly. The government reported second-quarter gross domestic product well below expectations, revised down growth in the first quarter, and revised last year's figures to show a much longer and deeper recession in the US than previously thought.
Although Goldman shaved its economic estimates, it is not forecasting a return to negative growth. Gross domestic product is forecast to grow at an annual rate of 2.5% in the third- quarter and 2% in both the fourth quarter of this year and the first quarter of 2003.
Further Fed cuts would increase the pressure on the Bank of England to shave UK rates, kept on hold at 4% for the ninth month in a row on Thursday.
Gavyn Davies, Goldman's former chief economist - now BBC chairman - doesn't have to worry too much about interest rates as he counts his millions. He recently trousered £5.9m by selling 125,000 shares in the bank at $73.92. He retains a small shareholding after being given stock worth around £100m when the bank floated on the New York Stock Exchange in 1999.
