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Fed Slashes Interest Rates By 75 Points |
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Written by Staff Writer
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Jan 22, 2008 at 11:51 AM |
The Federal Reserve on Tuesday moved to ease fears of a US recession by slashing interest rates by 75 basis points for the first time in more than 20 years.
In a statement, the Fed said: ”The Federal Open Market Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth.“While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households.
“Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labour markets.”It is the was biggest US rate cut since October 1984, when rates came down by 175 basis points. The Fed holds its January meeting next week and the market expects a further cut of at least 25 points and possibly 50 points.
The aggressive move represents an urgent effort by the Fed to get on top of the deteriorating economic situation, and a recognition that it had fallen behind the curve in monetary policy.
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Officials were planning a big shfit in policy at their January 30 policy meeting, but evidently felt they could not hold on for that scheduled event in light of the sharp deterioration in financial markets.
Alan Ruskin, chief international strategist at RBS Greenwich Capital. “Plainly the Fed realised that to try stay ahead of the market they had to act immediately. More obviously the Fed feels that they need to get rates down rapidly, and the quicker they get rates to a point where it validates or more likely goes beyond what the market is pricing in, the better.”
Shortly before the opening bell in New York, S&P 500 futures were down 59 points at 1,266.3. Nasdaq futures were down 81.5 points at 1,768 while futures for the Dow Jones Industrial Average were down 466 points at 11,640, after being more than 550 points down earlier in pre-market trade.
US bond yields remained sharply lower after the rate cut, with the yield on the two-year note 29 basis points lower at 2.05 per cent. In overnight trade the yield fell to 1.99 per cent.
“This smacks of panic,” said Marc Ostwald, strategist at broker Insinger de Beaufort.
In London, the FTSE 100 jumped more than 100 points after the Fed announcement, but the rally quickly ran out of steam and the blue-chip index was down 33 points at 5,544.8.
Other European markets also lower. After a brief rally, the FTSE Eurofirst 300 was back down 1 per cent at 1,268.52 just half an hour after the move. Frankfurt’s Xetra Dax shed 2.1 per cent to 6,645.68 and in Paris the CAC 40 fell 1 per cent at 4,698.88., in a continuation of the morning’s volatile swings.
The Fed cut came after Asian markets suffered the biggest falls in more than eight years in response to the sharpest slides in European indices since the 9/11 attacks on New York more than six years ago.
While Japan’s Nikkei 225 lost 5.7 per cent to 12,573.1, an 8.6 per cent slide on Hong Kong’s Hang Seng index to 21,757.6 constituted the index’s worst two-day fall since the aftermath of the 1997-98 Asian financial crisis.
Australia’s S&P/ASX 200 recorded its biggest slide since the index was launched in 2000, closing 7.1 per cent lower.
Monday’s sell-off was triggered by concern about the prospect of a US recession and more fall-out from credit market turmoil.
Ian Scott, strategist at Lehman Brothers, said the markets were pricing in a severe slowdown in the global economy
“We have seen one of the fastest declines in equity indices in 30 years. By our calculations, markets are now pricing in a certainty of recession in the US and 84 per cent probability of a similar impact to earnings in Europe,” he said. |
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