The Federal Reserve will do whatever it takes to ensure that the US does not fall into a deflation trap, vice-chairman Don Kohn said yesterday, as data showed consumer prices fell sharply last month.

His comments came as continuing worries about the global economy and concerns about the strength of banks’ balance sheets pushed Britain’s FTSE 100 index of leading shares down nearly 5%. The remarks will reinforce expectations that the US central bank may cut interest rates again by as much as 50 basis points from the current level of 1 per cent in December.

The Fed believes the US economy is in the midst of a roughly year-long recession that will last until summer 2009. Meetings of a policy meeting last month said 'participants generally expected the economy to contract moderately in the second half of 2008 and the first half of 2009'. Fed officials are now more bearish on US unemployment after the economy suffered a severe shock during September and October.

Financial Times