While the European Central Bank and the Bank of England have been reluctant to cut interest rates aggressively to ward off the worst effects of the financial market turmoil of the past year, the US Federal Reserve has shown no such caution.

The Fed has cut rates six times in the past seven months by a cumulative total of 300 basis points. With its latest rate cut last month, the central bank has taken the fed funds rate down to 2.25 per cent, its lowest level in four years.

The alacrity with which the Fed has cut, especially in the past three months, and the continuing bleak economic consensus for the US have seemed to suggest that the rate reductions would go on for a while yet.

Most financial market economists assumed that the central bank would reduce the funds rate several more times over the coming months, with a sizeable number of analysts expecting short-term rates to go as low as 1 per cent by the fourth quarter of this year.

But in the past week or two, there have been signs that perhaps we might be closer to the bottom of the interest rate cycle than we had previously thought.

First, the economy has shown some mildly encouraging indications of resilience. Industrial production bounced back last month after a plunge in February, led by signs of stabilisation in manufacturing output. The latest indications from the various regional purchasing managers' surveys suggest that production might actually be edging back up.

At the same time, inflation pressures continue largely unabated, with the surge in global food prices strengthening the voices of those within the Fed who have been arguing the central bank should hold off from further rate cuts for fear of adding fuel to the flames.

Wall Street's reporting season is in full swing and this too has contributed to a sense that perhaps the worst is past. Financial companies' earnings remain grim, of course, but other sectors seem to be holding up and equities overall have had a surprisingly buoyant April.

Other financial market indicators also suggest interest rates may not need to go much lower. The yield curve - the gap between rates on longer and shorter-dated debt - has steepened significantly in the past month or so, a possible early sign that the recession may be short-lived. Now, on top of all this data, we have some words to digest from Fed officials.

Two policymakers who have been strong supporters of lower interest rates hinted last week at a change of heart. Janet Yellen, the president of the San Francisco Fed, suggested for the first time that she thinks rates might not have to go much lower.

In a speech in California last Wednesday she described the current federal funds rate as “accommodative” and suggested the current low level of interest rates, combined with the tax cuts that will start to feed through to consumers in the next few months, might be enough for now.

She said: “Such accommodation [is] an appropriate response to the contractionary effects of the ongoing financial shock and the housing downturn and I anticipate that the resulting stimulus, combined with that of the fiscal package, will foster a moderate pick-up in growth later this year.”

Earlier Kevin Warsh, a Fed governor, had suggested in a speech in New York that there were limits to what monetary policy could achieve in the face of the financial difficulties confronting the economy.

“Fed policy - both with respect to liquidity tools and monetary policy - is partially offsetting the consequences of the liquidity and credit pullback on real activity. But we must be careful to not ask policy to do more than it is rightly capable of accomplishing.”

Mr Warsh's remarks echo those of other economists - inside and outside the central bank - who are concerned that the Fed's aggressive rate-cutting moves are subject to distinctly diminishing returns as financial institutions deal with the detritus of sub-prime mess.

None of this means the Fed will not cut rates again when its policymaking committee meets next week, as the market currently expects. A quarter point cut in the funds rate to 2 per cent seems more or less guaranteed and the central bank has done nothing yet to steer financial markets in a different direction.

But don't be surprised if the Fed statement next week hints that this seventh rate cut may be the last.

gerard.baker@thetimes.co.uk

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