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Wall St upset with Fed’s quarter-point cut

Move in line with forecasts; some observers had hoped for more

WASHINGTON – THE United States Federal Reserve cut interest rates by a modest quarter-percentage point on Tuesday.

The move disappointed Wall Street’s hopes for bolder action but offered some help to an economy facing credit strains and a deep housing slump.

The central bank’s decision takes the bellwether federal funds rate, which governs overnight lending between banks, down to 4.25 per cent.

While the action was widely expected, some economists had thought the Fed might offer a bolder half- point reduction.

In a related move, the Fed trimmed the discount rate it charges for direct loans to banks by a matching quarter point to 4.75 per cent.

Here, too, some market participants were dissatisfied. Many had thought the Fed would lower the discount rate by more than the federal funds rate to loosen tight credit markets.

The blue-chip Dow Jones Industrial Average closed down 294.26 points, or 2.1 per cent, to 13,432.77, while prices for US government bonds surged as investors sought safer assets.

‘This was not what the market was looking for and did not move to clarify Fed intentions or assuage concerns of market participants of another leg down in the economy and resurgence of financial turmoil,’ said Mr Joseph Brusuelas, chief US economist of IDEAglobal in New York.

A Fed source, who asked not to be named, said the central bank was aware that credit market strains had grown worse and was actively considering ways to ease the pressure.

In a statement outlining its rate decision, the Fed noted that financial strains had increased in recent weeks.

But it also said some inflation risks remain.

It refrained from offering its usual assessment of the balance of risks facing the economy, catching off guard some economists who had looked for the Fed to underscore its concerns about weakening economic growth.

‘Recent developments, including the deterioration in financial market conditions, have increased the uncertainty surrounding the outlook for economic growth and inflation,’ it said.

The Fed has now cut overnight rates – its key economic policy lever – by a full percentage point since mid-September, in an effort to put a floor under an economy increasingly seen at risk of falling into recession.

‘Today’s action, combined with the policy actions taken earlier, should help promote moderate growth over time,’ the Fed said.

Boston Federal Reserve Bank president Eric Rosengren dissented against the decision, preferring a half- point reduction in the federal funds rate.

While the Fed stopped short of saying weakness was the greatest economic risk, it left the door open to further rate reductions. A survey conducted after the rate announcement showed that a majority of Wall Street dealers polled expect the Fed to lower borrowing costs again next month.

‘The Fed is trying to navigate through a storm, in which risks to growth have risen at the same time that inflation expectations have drifted higher, a difficult balancing act,’ said Mr Michael Darda, chief economist of MKM Partners in Greenwich, Connecticut.

The Fed’s decision follows renewed deterioration in credit markets, after major financial institutions around the world reported billions of dollars worth of write-downs due to extensive exposure to delinquent mortgages.

 

Source: REUTERS (The Straits Times 13 Dec 07)

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