Fed Cuts Rate, Pumps In $9.2b

Source : Weekend TODAY, August 18, 2007

EVEN as Singapore stocks fell for the third straight day on Friday — as panicked selling set regional stock markets awash in a sea of red—winds from the West were blowing in hope of a break in the storm when markets reopen on Monday.

In a surprise one-two move, the United States Federal Reserve announced it was cutting its discount rate by 0.5 percentage points to 5.75 per cent, and said it was prepared to take further action to “mitigate” damage to the economy from the rout in global credit markets.

It also pumped US$6 billion ($9.2 billion)— the third injection in less than two weeks — into the distressed financial system.

“Financial market conditions have deteriorated and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward,” said the central bank’s Federal Open Market Committee in a statement. “The downside risks have increased appreciably.”

The effect of the rate cut was immediate. European stocks jumped the most in four years while US stock-index futures, too, rallied.

The Standard & Poor’s 500 Index had surged 29.07, or 2.1 per cent, to 1,440.34 soon after opening in New York. The Dow Jones Industrial Average climbed 291.18, or 2.3 per cent, to 13,136.96. The Nasdaq Composite Index rose 71.18, or 2.9 per cent, to 2,522.25.

Meanwhile, the Dow Jones Stoxx 600 Index jumped 3 per cent to 363.05 at 1.36pm local time in London, the biggest gain since April 2003. The Stoxx 50 advanced 2 per cent, while the Euro Stoxx 50, a measure for the Euro region, gained 2.6 per cent.

The Fed’s move, said fund manager Vafa Ahmadi at CPR Asset Management in Paris, “provides more liquidity to a market that needs it terribly. It’s a bowl of oxygen to those who couldn’t refinance”.

The US central bank reduced the rate at which it makes direct loans to banks—the first time it has so acted outside its regular ratesetting meetings since 2001.

“The Fed was going to have to do something and this seems to be a good step,” said Mr Malcolm Polley of Stewart Capital Advisors. “I’m hopeful that this will be enough.”

In Singapore, the Straits Times Index (STI) dropped below the psychological 3,000-point level intraday but recovered in late trade, as did some regional stock markets. After losing nearly 6 per cent intraday, the STI closed 0.7 per cent down at 3,130.71.

As worries that the US housing loan crisis might lead to economic recession gripped Asian investors, the Nikkei 225 Stock Average led the market falls.

It ended 5.4 per cent down at 15,273.68, the lowest level since August last year. The fall in percentage terms was also the largest since the 911 terror attacks.

The yen, meanwhile, rose to 14-month highs against the US dollar on Friday, as heightened aversion for risk led to the unwinding of the so-called carry trade.

But economists were mostly confident Asia’s economies would withstand global economic shocks because of robust domestic consumption. Said UBS AG economist Jonathan Anderson: “Even if the US consumer does go into recession, the overall impact on Asian exports should be much lower than the last time around.”

Going by events on Friday, that possible recession seems to have been staved off for now. — AGENCIES