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Fed set to halve rates, Goldman Sachs reports loss

The United States Fed appeared set to cut interest rates to within sight of zero on Tuesday and Japan was weighing steps to ease funding when borrowing costs have been cut to the bone.

Wall Street bank Goldman Sachs posted a net loss of $2,12-billion in its latest quarterly report, hurt by the plunging value of stocks, debt and real estate.

In Europe, manufacturing and services activity in the euro single currency area sank to new lows in December, a survey showed, pointing to a deepening recession and prompting talk of an interest rate cut next month.

European new car sales dropped by a quarter in November and manufacturers scaled back production.

Responding to the worst financial crisis in 80 years, the Federal Reserve is expected to cut its benchmark rate by at least half a point to 0,5%, its lowest in more than half a century.

As it runs out of room for further rate cuts, the Fed is likely to promise to look at other instruments to pull the world’s biggest economy out of recession.

US consumer prices plunged at a record rate for a second straight month during November, figures likely to fan fears that economic recession is rapidly heightening risks of deflation.

Japanese example
The Fed may take a leaf out of the Japanese economic textbook as interest rates head towards zero.

In Japan, where rates are already at an ultra-low 0,3%, the finance minister urged the central bank to also take unorthodox steps to ease a funding crunch.

Bank of Japan Governor Masaaki Shirakawa said he was studying possible effects of so-called quantitative easing, a policy of flooding banks with zero interest money, which Japan adopted early this decade to spur lending and jump-start a stagnant economy.

Economists expect the Fed to acknowledge it will have to resort to direct purchases of government and mortgage-related debt and possibly Japanese-style money injections.

Analysts are also debating whether the biggest plunge in business confidence in three decades will prompt the Bank of Japan to lower rates again when it meets this week.

Shirakawa on Tuesday appeared to keep the door open to more easing, telling lawmakers economic conditions grew increasingly severe and pledging ”appropriate actions”.

”The last time the world economy was in severe conditions was 1929 and the years that followed. Things are not completely the same today, but we can say it is in the severest conditions since then,” he told lawmakers.

Ahead of the Fed, the central bank in Saudi Arabia, the world’s biggest oil exporter, cuts its two main interest rates by 50 basis points on Tuesday.

European shares were little changed after volatile trading before the Fed decision, due to be announced around 7.15pm GMT. US stocks were expected to open higher.

Demand for oil slumps
Oil producer group Opec said recession in many industrialised nations would bring a drop in world oil demand for the first time in 25 years.

The forecast sets the stage for a substantial production cut when Opec members meet in Algeria this week.

In its monthly oil market report, Opec said demand for its crude is expected to fall by an average of 1,4-million barrels per day (bpd) next year, with the first half of 2009 seeing an even steeper decline.

Oil prices rose above $45, lifted by expectations that Opec will this week agree its largest ever supply cut lending support. Oil prices have plunged $100 from their all-time high in July because of slumping demand as economies stall. – Reuters

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Keith Weir
Keith Weir works from London. Editor, Reuters. Mainly business news these days. Former correspondent in Rome, Amsterdam, Dublin and London. Keith Weir has over 696 followers on Twitter.

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