News Brief – January 22, 2008
The US Federal Reserve stunned the market with a dramatic three-quarter point cut in interest rates just an hour before the US markets opened.
Attempting to stave off a deepening US recession, the move failed to calm investors, with US shares continuing sharp falls as Wall Street opened for trading Tuesday morning.
Here are some initial reactions from the financial world:
Ted Scott, manager of F&C's UK Growth & Income Fund said the rate cut is a response to the rapidly deteriorating economic conditions that the market is increasingly factoring in.
Indeed, he said, the market has spoken to the Fed and the Fed has listened. In the short term that may provide a fillip to equities and a relief to borrowers.
However, the move also smacks of panic, Scott said. It is an emergency cut as the meeting was not scheduled until the end of the month, he said. Furthermore, the cut suggests that the economy is already in dire straits and paradoxically confirms the markets worst fears.
Scott continued that the Fed has been reactive rather than proactive and the danger is that it is too little, too late. For the longer term such a loose monetary policy runs the risk of stocking up inflation which may be why the Fed has been slow to react.
Paul Ashworth, US economic specialist at Capital Economics told the Telegraph:
“Yes, this may look like the Fed is panicked, or bailing out Wall St, but it was probably the right decision.
"In the accompanying statement the Fed stressed the increasing downside risks to growth and the deterioration in broad financial conditions. It concluded by saying that "appreciable downside risks to growth remain", which is a pretty clear indication that we could see a further 50bp reduction to 3.25pc when the Fed meets again next week.
"Finally, the vote was not unanimous, Bill Poole wanted to wait until next week. Interestingly, because we haven't had the annual rotation of voters that takes place at the start of the Jan. meeting, it was last year's voters that took the decision.
"Next week Poole won't be voting, although arch-hawk Charles Plosser will be, so don't expect the next cut to necessarily be unanimous either. finally, as a result of today's action we are cutting our end-year forecast for fed funds to 2.5pc, from 3.0pc.”
Many analysts were agreed that the panic was a key word in describing the Fed’s interest rate cut.
"Unfortunately they have no power to reverse what in my opinion is the worst post-war recession," said Michael Metz, chief investment strategist at Oppenheimer in New York told the BBC.
The BBC's business editor Robert Peston described the rate cut as “huge”. "And it is a big risk. If this doesn't work, then people will say they have nothing left in their locker."
Analyst Jeremy Stretch of Rabobank, also described the Fed's move as "a sign of panic".
However he added, “it certainly indicates that the Federal Reserve wants to be seen as taking action over the concerns of an economic downturn."
Last updated 23/01/2008