U.S., China kick off global round of rate cuts

By Claudia Parsons

NEW YORK (Reuters) - The United States and China kicked off what is likely to be a global round of interest rate cuts, part of a barrage of measures deployed around the world to fight a deep economic slowdown.

Norway also cut interest rates and Britain indicated it may lift self-imposed limits on government borrowing to counter a recession that stems from the financial crisis triggered by the collapsed U.S. housing bubble.

"The markets got the (U.S.) rate cut that they expected and a policy statement that was decidedly downbeat on the economy," said Stuart Hoffman, chief economist at PNC Financial Group in Pittsburgh, Pennsylvania, after the U.S. Federal Reserve cut interest rates by half a percentage point on Wednesday.

Japan may cut rates on Friday and the European Central Bank and Britain are expected to add to the monetary easing next week as authorities remain fearful that the worst financial crisis in 80 years will cause a long global recession.

U.S. regulators are finalizing a new federal program to provide up to $600 billion in government guarantees of home mortgages to help prevent foreclosures, a source familiar with the talks said. [ID:nN29488864] The program could be announced as soon as Thursday, the source said.

The International Monetary Fund approved an emergency short-term liquidity facility for emerging market economies to help them weather the credit crisis.

The Fed said the pace of U.S. economic activity appeared to have slowed markedly and it expected inflation to moderate as a result of lower energy and commodities prices.

Major U.S. stock indexes rallied more than two percent before falling back to close lower.

Analysts welcomed the move but said it had already been priced in and the outlook remains grim.

"Bigger picture, I don't think anyone believes that any interest rate cuts are going to affect the underlying issues surrounding mortgage-related and consumer-related credit," said Chip Hanlon, president of Delta Global Advisors in Huntington Beach, California.

China, increasingly appearing to be the world's last engine of economic growth, cut its interest rate to 6.66 percent from 6.93.

Norway's central bank cut rates by half a percentage point to 4.75 percent, signaling more moderate cuts ahead to help shield the oil-fueled economy from the crisis.

WORLD STOCKS RISE, DOLLAR DOWN

The interest rate cuts, and expectations of the U.S. cut, lifted world stock markets and sent the U.S. dollar plunging to its biggest one-day drop in 23 years, sparking a 7 percent surge in oil.

Japan's Nikkei index ended up 7.7 percent and European shares climbed 7.5 percent.