The US Federal Reserve has, as expected, cut interest rates by 0.25%, and indicated that this could be the end of the reductions for the time being.
In a statement issued in Washington early this morning the Fed said its Open Market Committee had decided to lower its target for the federal funds rate 25 basis points to 4.5%.
The move confused sharemarkets in the US and pushed up interest rates with the 10 year bond hitting 4.45%.
Earlier the US economy had shown strong third quarter growth, up nearly 4%, but with minimal inflationary pressures.
Gold was up to $US795.30, a rise of $7.50 an ounce ahead of the Fed news. It topped $US800 for the first time since 1979 after the Fed announcement before easing a touch.
The US dollar fell to a new low against the euro and the Australian dollar surged past 93 US cents to hit 93.28, a new 23 year high. It then eased to around 93.15 USc in New York.
The rise in bonds came as traders focused on the Fed's concentration on future inflation worries by pointing to recent rises in energy and commodity prices: a comment that came as oil prices topped $US94 a barrel for the first time ever and rose past $95 a barrel in after hours trading.
Oil closed up $US4.15 a barrel at a record $94.53 after hitting a peak of $94.74 a barrel after the Fed news.
The Fed statement read:
"Economic growth was solid in the third quarter, and strains in financial markets have eased somewhat on balance.
"However, the pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction.
"Today's action, combined with the policy action taken in September, should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.
"Readings on core inflation have improved modestly this year, but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation. In this context, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.
"The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth." (2007 Monetary Policy Releases).
Wall Street was mixed, falling, rising and not developing a taste for the statement as analysts realised the Fed had left not left any hints about the next move on rates except to say that it will act to foster 'price stability and sustainable economic growth. But it eventually rose sharply in late trading..
It was a very different reaction compared to the exuberance after the surprise 0.50% cut in the rate after the meeting on September 18.
A sharp rise in oil prices to $US94.40 a barrel on the second weekly drop in US oil stocks, dominated the markets earlier on and left analysts wondering if that influenced the neutral tone of the Fed's statement.
The price had risen through $US94, eased and then climbed back over it after the Fed's statement. Oil peaked at $US94.80 in hectic late trading before easing to its close of $US94.53.
The violent movement in commodity prices came as the greenback fell on the rate cut (as was expected).
Overnight third quarter Gross Domestic Product figures showed a sharp rise of 3.9%, the strongest rate since the start of 2006, but one that was driven by a 16% surge in exports and a rise in business inventories. Exports added almost 1% to the growth figure and inventories 0.4%.
More worrying is the worsening state of US corporate profitability.
US earnings will be down for the first time in nearly five years according to preliminary numbers on the reporting of companies in the Standard & Poor's index of 500 stocks.
The technology-crazed US market was at 31 times earnings in early 2000 but this time round it is different.
The price/earnings multiple of the US, at 18 times, has been falling for several years.
Stocks may have soared, but earnings have risen by more, to levels which imply unsustainably high returns on capital. Bears are worrying about a profit bubble, not a valuation one. (Sound familiar in Australia?)
That makes the third-quarter US earnings season, which will be largely completed by the end of this week, worrying.
Looking at a mix of actual and estimated earnings, S&P 500 profits will drop by around 1% per cent year- on-year, according to Thomson Financial.
This would be the first fall in 19 quarters, and represents a slump in expectations. In July, third-quarter growth was forecast to be 6%.
And these figures don't break out domestic based earnings vs. those from international operations and exports. If you knock out the overseas earnings of America's huge multi-nationals, then the earnings picture in the US heartland isn't all that hot. Technology is doing well but that's about all.
As we saw from the GDP figures, the sharp fall in the greenback has boosted exports, saving the US economy from plunging lower into a slump caused by the housing crisis.
Tuesday the Fed had the news that US consumer confidence had fallen to a three year low The US Conference Board said its consumer sentiment index fell to 95.6, the lowest since October 2005, from 99.5 in September.
That's a big fall and has retailers worried in the US as they approach the biggest selling season of the year from the end of next month to Christmas.
US housing companies have lost billions of dollars in write downs an
