FED slashes rates to head off slowdown
Stocks surged after the US Federal Reserve moved aggressively to head off the risk of asharp slowdown in the US economy yesterday by cutting interest rates 50 basis points to 4.75 per cent.
The Fed said the rate cut was to "help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets". It was also intended to "promote moderate growth over time".
It also cut the discount rate at which the US central bank lends directly to banks by 50bp and held out the possibility of further interest rate cuts to come.
Tightening in credit conditions had the potential to "intensify the housing correction and to restrain economic growth more generally", the Fed said.
Hinting at possible further easing, the Fed said market dev-elopments had "increased the uncertainty surrounding the economic outlook".
It would "continue to assess the effects of these and other developments" and "act as needed" to pursue its dual objectives of stable prices and sustainable economic growth.
The S&P 500 index was up2.14 per cent at 1,508.29, after having been higher by about0.5 per cent in early afternoon trade. The financial sector led the gains.
The dollar set a new record low of $1.3964 against the euro, while interest rate futures continued to price in more rate cuts over the next 12 months, with the three-month rate, seen at 4.28 per cent by September 2008, down from 4.45 per cent early in the day.
Bond yields diverged as the yield on the policy-sensitive two-year note plunged 11bp to3.95 per cent, while the yield on the 30-year bond rose sharply.
The long bond yield rose to4.8 per cent from 4.74 per cent. Gold prices rose to a 26-year high of $733.40 an ounce. Oil also hit a record high in the US.
Core inflation, the Fed observed, had "improved modestly this year" - a significant shift since the previous meeting, when it believed a sustained decline in inflation had not yet been "convincingly demonstrated". But "some inflation risks remain" and the committee pledged to "continue tomonitor inflation developments carefully".
This reference is a reminder that, while no policymakers formally dissented from yesterday's decision, a number of officials remain worried about inflation.
Opting for an aggressive 50bp cut rather than an incremental 25bp reduction reflects the Fed's reluctance to fall behind at a time when the economic outlook is evolving rapidly.
Officials are anxious to act pre-emptively to reduce the risk of a severe slowdown that could turn into a recession, even though there is little evidence to date that the economy is approaching such a tipping point.
To the extent that they are able to reduce the recession risk, their actions should helpstabilise financial markets, in particular the market formortgage-backed securities.
Some of the most senior officials favoured a 50bp move to create a positive psychological effect on the markets.
The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.
The Fed said the rate cut was to "help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets". It was also intended to "promote moderate growth over time".
It also cut the discount rate at which the US central bank lends directly to banks by 50bp and held out the possibility of further interest rate cuts to come.
Tightening in credit conditions had the potential to "intensify the housing correction and to restrain economic growth more generally", the Fed said.
Hinting at possible further easing, the Fed said market dev-elopments had "increased the uncertainty surrounding the economic outlook".
It would "continue to assess the effects of these and other developments" and "act as needed" to pursue its dual objectives of stable prices and sustainable economic growth.
The S&P 500 index was up2.14 per cent at 1,508.29, after having been higher by about0.5 per cent in early afternoon trade. The financial sector led the gains.
The dollar set a new record low of $1.3964 against the euro, while interest rate futures continued to price in more rate cuts over the next 12 months, with the three-month rate, seen at 4.28 per cent by September 2008, down from 4.45 per cent early in the day.
Bond yields diverged as the yield on the policy-sensitive two-year note plunged 11bp to3.95 per cent, while the yield on the 30-year bond rose sharply.
The long bond yield rose to4.8 per cent from 4.74 per cent. Gold prices rose to a 26-year high of $733.40 an ounce. Oil also hit a record high in the US.
Core inflation, the Fed observed, had "improved modestly this year" - a significant shift since the previous meeting, when it believed a sustained decline in inflation had not yet been "convincingly demonstrated". But "some inflation risks remain" and the committee pledged to "continue tomonitor inflation developments carefully".
This reference is a reminder that, while no policymakers formally dissented from yesterday's decision, a number of officials remain worried about inflation.
Opting for an aggressive 50bp cut rather than an incremental 25bp reduction reflects the Fed's reluctance to fall behind at a time when the economic outlook is evolving rapidly.
Officials are anxious to act pre-emptively to reduce the risk of a severe slowdown that could turn into a recession, even though there is little evidence to date that the economy is approaching such a tipping point.
To the extent that they are able to reduce the recession risk, their actions should helpstabilise financial markets, in particular the market formortgage-backed securities.
Some of the most senior officials favoured a 50bp move to create a positive psychological effect on the markets.
The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.
Labels: credit crunch, FED, interest-rates, US Dollar
posted by Drs Search @ 3:25 PM
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