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Major European Interest Rate Cuts Fail to Rally World Markets


Continued economic weakness has led to another round of interest rate cuts in Europe, while the number of Americans receiving unemployment benefits has reached a 26-year high.

For the third time in as many months, the European Central Bank has slashed interest rates - this time by three-quarters of a percent, the largest cut in the currency bloc's 10-year history. Central banks in Britain and Sweden cut interest rates even more aggressively.

ECB President Jean-Claude Trichet says Europe's anemic economic performance has greatly reduced any risk that lower interest rates will kindle inflation.

"There is increased evidence that inflationary pressures are diminishing further," he said. "The decline in inflation rates is due mainly to the fall in commodity prices and the significant slowdown in economic activity largely related to the global effects of the financial turmoil."

In the United States, new claims for unemployment benefits moderated slightly last week, but still remain at levels indicative of a contracting labor market. Overall, more than four million Americans are receiving unemployment benefits, the largest number since 1982.

Massive job cuts are no longer limited to America's battered financial sector, according to Deutsche Bank's chief U.S. economist, Joseph Lavorgna.

"The U.S. economy and, to a larger extent, the global economy just completely shut down," he said. "And companies are freezing all of their hiring, and in many cases laying workers off because demand [for their products] has completely collapsed."

The Commerce Department provided further evidence of reduced demand for goods, reporting a 5.1 percent decline in U.S. factory orders for October, the biggest drop in eight years.

In addition, with the exception of bargain outlets, U.S. retailers are reporting weak sales figures for November.

"Rising food prices and the fear about losing your savings, losing your job, has all kicked in [intensified], and people are learning how to just say 'no' [to non-essential purchases]. December sales will be miserable," said retail analyst Candace Corlett.

Many economists trace the economic slowdown to a credit crunch sparked by a wave of home foreclosures and mortgage defaults in the United States. To help spur lending, resuscitate America's moribund housing sector, and boost the economy as a whole, the Federal Reserve has aggressively cut interest rates during the past year.

Yet, with interest rates already at historically-low levels and no evidence of a pick-up in the housing market, the Treasury Department is reportedly crafting new, creative means to force mortgage rates even lower. Under one option, the federal government would invest in securities that finance loans for home purchases, stipulating a significantly reduced interest rate.

The plan appeals to financial analyst Greg McBride.

"Lower mortgage rates are designed to put more buying power in the pockets of prospective home buyers," he said. "That helps anybody who is trying to buy a house, but it also helps people who are trying to sell them."

But analysts point out the idea would do nothing to lower mortgage payments for existing homeowners who are in danger of default.

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