Fed’s aggressive rate cut sparks global markets

A BIGGER-THAN-EXPECTED interest rate cut by the United States central bank sent global bourses sprinting ahead yesterday.

The half-percentage point cut by the US Federal Reserve was double the quarter-percentage point cut that most analysts expected – and immediately caused a surge in US stocks.

Last night, the optimism continued on Wall Street, with the Dow Jones Industrial Average up 97.30 points, or 0.71 per cent, to 13,836.69 at press time.

Asian markets were equally thrilled at the Fed’s move to restore confidence in global financial markets and head off the risk of a US recession after weeks of market volatility.

It was the Fed’s first cut of the benchmark Fed Funds rate in four years, and is set to relieve a credit crunch in the global financial system, sparked by a US mortgage market crisis, by flooding it with cheaper funds.

In a statement, the Fed said the ‘action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time’.

At home, the benchmark Straits Times Index registered its second biggest one-day gain in history when it soared 116.61 points to 3,594.36 yesterday – just 70.77 points shy of the record high of 3,665.13 hit on July 24.

Tokyo’s Nikkei-225 Index shot up 3.67 per cent, and Hong Kong’s Hang Seng Index soared 3.98 per cent to a record high.

Across Asia, lower interest rates are expected to give a fillip to the housing market and stimulate spending in big-ticket items such as cars.

This gave a big boost to real estate developers and banks, which were among the biggest gainers in the various regional bourses yesterday.

Analysts said the Fed’s move should also help to restore confidence in the troubled global credit markets, where international banks have been hoarding cash and refusing to lend to each other.

But they warned that the surge on Wall Street and other global bourses was fuelled by hopes of further interest rates cuts later on.

These cuts would, how- ever, depend on US economic data to be released over the next month, they said.

They warn that, going by the wording in the statement issued, the Fed might have been uneasy cutting interest rates with crude oil prices hitting record highs, fuelling fresh inflation fears.

The cut in the widely watched Fed Funds rate – which sets the pace for US interest rates – to 4.75 per cent came early yesterday morning Singapore time.

Wall Street immediately notched up its best one-day gain in four years as the Dow Jones shot up 335.97 points, or 2.51 per cent.

The size of the cut was a major surprise. It was correctly forecast by only 23 of 134 economists surveyed by Bloomberg News, while 105 predicted a quarter-percentage point cut; six forecast no change.

 

Source: The Straits Times 20 Sept 07

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