The Federal Reserve has cut US interest rates by half a per cent early this morning, Australian time.
The cut will disappoint a significant group in the market who were tipping a bigger cut of 0.75%.
The cut put the central bank’s federal funds rate at 1%.
That matches the lowest level for the rate ever — the last time it was at 1% was from June 2003 to June 2004.
The move came 12 hours after China’s central bank surprised with its third rate in two months.
The key one-year lending rate was cut to 6.66% from 6.93%. (The 0.27% is the usual Chinese cut or increase)
The People’s Bank of China said the deposit rate drops to 3.60% from 3.87% (still better than the stockmarket) The changes are effective from today. The three rate cuts total just over 0.80%, a substantial reduction by Chinese standards.
The US dollar fell before and after the Fed’s cut with the Aussie hitting 66 US cents and rising above that level, up 10% this week so far. Gold, oil and copper all rose and Wall Street fell after the rate cut was announced.The Dow and the S&P 500 was off around 1%; our market was forecast to be up by just over 1%.
Oil was up 7.6% at the close or more than $US4.70 a barrel at $US67, the strongest rise for some weeks.
Traders looked again at the bank’s statement and saw more rate cuts ahead and the futures market is pushing at another cut at the next Fed meeting in about six weeks time. That why copper jumped 11% to $US2.06 a pound.
European markets rose strongly after Wall Street’s big rise Tuesday.
Explaining the cut the central bank pointed to the lengthening list of downside risks; with consumer spending slowing, along with business spending, with industrial output. Inflation was now not a problem, but all the risks were to growth (i.e. with the economy sliding towards recession).
It made for a depressing roll call of factors that have driven markets lower in recent weeks. It was the second half a per cent cut this month after the global co-ordinated move on October 8.
The sharp fall in US consumer confidence slumped to a record low this month, seen in a report from the US Conference Board yesterday, had changed attitudes to a bigger cut in the minds of futures traders.
The Fed said in its post decision statement that:
"The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures.
"Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports.
"Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.
"In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.
"Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth.
"Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability."
US consumer confidence fell from a reading of 61.4 in September (which was actually increased from the first report) to 38 this month – the lowest level since the index was established more than 40 years ago and well below market expectations.
The previous all-time low in the index was set in December 1974, when consumer confidence fell to a level of 43.2.
Not helping was another fall in US home prices suffered a record drop of 16.6% over the year to August 2008 – worse than the annual drop of 16.3% in July.
On a monthly basis, price fall accelerated as well – with the 20-city index falling by 1% compared with a 0.9% drop the previous month.
This is a three month rolling index so it makes it more accurate: but it won’t really reflect the damage done from the credit implosion in September and next month until January-March: it could be bloody.
Some parts of the US are seeing a slowing in the rate of fall in prices, but in Phoenix in New Mexico and in Las Vegas, Nevada, the decline is now over 30% and showing no sign of slowing. (This is hurting companies in Australia, like Aristocrat)
The Fed’s cut takes this month’s trimming to 1% because of that half a per cent cut earlier with the Bank of England the European Central Bank and the Bank of England.
The ECB meets next week and another rate cut is on the cards. It’s said as much this week in comments from senior members of the board.
The Fed decision will be weighed by our Reserve Bank which meets Tuesday in Sydney and is expected to cut rates by 0.25% at least, and probably 0.50%.
A few hours after the Fed cuts rates, the USA Government will report its first estimate of third quarter growth and the news won’t be good.
US economists are tipping a contraction of 0.50% in third quarter GDP, thanks to slumping retail sales, the falling car industry and a general downturn in the willingness of US consumers to spend.
It will not make pleasant reading, according to some forecasters because it will get worse in the fourth quarter and probably in the March quarter of 2009.
In Tokyo a repor
