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Fed slashes rates in bid to halt share selloff

‘Emergency’ cut of 0.75 percentage points is its biggest in 26 years

THE United States central bank slashed interest rates last night in a desperate bid to halt a global share market bloodbath and keep recession at bay.

The dramatic ’emergency’ rate cut of 0.75 percentage points was far higher than expected and the biggest single cut in 26 years. Its surprise move reflects the escalating fears that the US economy will slow down and drag the rest of the world with it.

The Fed hinted that it is prepared to keep cutting rates if necessary, saying that ‘appreciable downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks’.

The rate cut was announced an hour before US markets opened and had the desired effect of calming jittery European markets, with London’s Footsie index ending 161.9 points higher at 5,740.1.

On Wall Street, the Dow Jones Industrial Average initially joined the plunge that had shaken world markets for two days. It plunged by more than 460 points after opening but by 2.30am this morning (1.30pm New York time), the Dow was off by 118.52 points, or 1 per cent.

But the cut came too late for Asian bourses, which were battered for a second straight day as investors bailed out and big global funds sold anything they could get their hands on.

Singapore was the region’s best performer after it restricted losses to a mere 50.6 points, thanks to a bluechip rally late in the day. But that brought its loss this year to 17.3 per cent.

Commentators were split on the Fed’s rate cut.

Deutsche Bank analyst John Tierney told Reuters in New York: ‘The Fed is very, very, very worried. Markets may perk up a bit until it figures out what this means.’

But Action Economics’ Ron Simpson said: ‘This is a gutless move by the Fed. (It) just fuels panic trades further. And the markets are pricing in more rate cuts next week.’

Fears also mounted that the Fed may run out of options to fight a global financial crisis. If rate cuts do not work, it has little left.

Global investors have already bought into the recession story and have been rushing for the exits this week, sending markets into free-fall.

The evidence was almost everywhere in Asia yesterday: Hong Kong’s Hang Seng Index suffered a staggering plunge of 2,061.2 points or 8.7 per cent – its biggest-ever one-day drop – while Australia went into a 7.05 per cent nose-dive and the Shanghai Composite Index fell 7.2 per cent.

India looked set for a total meltdown when its market sank by more than 11 per cent early on. A one-hour trading ban calmed nerves and allowed the index to close down about 5 per cent.

The commodities markets were also hit, as crude oil fell US$2.53 (S$3.63) to US$88.04 a barrel.

Singapore traders were struggling to get a handle on the cause of such mayhem, but there was talk that hardpressed hedge funds were behind much of it.

They were being forced to clear their positions after failing to top up the margins on loans they had taken to make massive bets on regional stocks and commodities.

And other predatory funds were adding to the chaos and uncertainty by short-selling in the hope of buying back the shares more cheaply.

With all of that going on, it was little short of a miracle that the Straits Times Index managed to call it a day only 1.73 per cent down at 2,866.55 after plunging by 171 points after lunch.

But many fortunes were lost during the day, as banks force-sold shares of clients pledged as collateral for loans. ‘We have dealers telling us that their clients are threatening to kill themselves if they are hit by further margin calls,’ said a local brokerage’s risk management head.


Source: The Straits Times 23 Jan 08


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