Speculation that the Federal Reserve will be forced to cut America’s interest rates to bolster its economy was rekindled yesterday after steep downgrades to US growth fuelled worries over prospects.

Estimated growth in the final quarter of last year (Q4) was sharply pared back to a modest pace of only 2.2 per cent at an annual rate – much lower than initial estimates that the world’s largest economy grew by a buoyant 3.5 per cent.

The revisions were widely anticipated by Wall Street but nevertheless sparked warnings of worse to come. Analysts said that the American economy may well be on course for a further slowdown in the first half of this year that could boost the chances of early cuts in US interest rates from the Fed.

“Fed rate cuts remain a possibility,” James Knightley of ING Financial Markets said.

The large downgrade to Q4 growth was mainly driven by a much larger build-up of stocks by US companies than was previously calculated by official statisticians. A bigger impact from stockbuilding accounted for more than half of yesterday’s cut in estimated growth, with the inventory build-up substracting a hefty 1.4 per centage points from the pace of US expansion in Q4.

In better news, consumer spending growth accelerated to an annual rate of 4.2 per cent, from 2.8 per cent in Q3.

But there were worries over the durability of this pickup, which was fuelled by the boost to Americans’ pockets from substantial drops in energy costs at the end of last year – a situation that has since been reversed. Anxiety over the outlook was also stoked by the first fall in business investment, which declined by 2.4 per cent in Q4 in the first such decline since the start of 2003.

There was reassuring news on inflation for the Fed, however, as its favoured GDP-based gauge of price pressures showed that economy-wide prices tumbled by 0.9 per cent in Q4 – the first decline in the measure since 1961 and the steepest since 1954.

Ben Bernanke, the Fed Chairman, last night played down the impact of Tuesday’s financial market turmoil, telling the US Congress that it had not altered his view of US prospects.

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