US Federal Reserve sets precedence with 0.75 per cent emergency rate cut

23 January 2008 / by Joy Tibbs
The Federal Reserve has slashed interest rates by 0.75 per cent from 4.25 per cent to 3.5 per cent. The move is likely to raise hopes of a sizeable rate cut in other economies, including the base rate in the UK. The bank said in a statement that it was responding to a "weakening of the economic outlook and increasing downside risks to growth".

According to reports, the Fed's decision was based on a significant stock market downturn, anticipation of a further decline within the housing market and a weakening labour market. Reports of an impending recession have been rife leading up to the announcement, which was not expected until the end of the month.

Manager of F&C's UK Growth and Income Fund, Ted Scott, says: "The market has spoken to the Fed and the Fed has listened. In the short term that may provide a fillip to equities and a relief to borrowers.

"However, the move also smacks of panic. It is an emergency cut as the meeting was not scheduled until the end of the month. Furthermore, the cut suggests that the economy is already in dire straits and paradoxically confirms the markets worst fears."

Fears remain that the dramatic cut alone will not be enough to save the US economy, and that a recession will undoubtedly impact upon global markets.

"The US Federal Reserve has acted very aggressively in cutting interest rates by 0.75 per cent, a week before the scheduled meeting. This is the first time since 1984 that it has cut rates by 0.75 per cent in one go," comments Richard Woolnough, manager of the M&G Optimal Income Fund.

"The move is undoubtedly intended to boost the ailing economy, and offer reassurance to financial markets, but it doesn't change the fact that the US economy is in serious trouble," he adds.

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