US Fed Rate Cut Will Create More Problems: Marc Faber

Source : The Business Times, August 21, 2007

(HONG KONG) The US Federal Reserve's cut of the rate it charges banks to boost investor confidence was 'unjustified' and would create more problems, investor Marc Faber said yesterday.

Dr Faber: Intervention by the US Fed not justified

The discount rate was lowered to 5.75 per cent from 6.25 per cent last Friday, the first time the Fed cut borrowing costs between scheduled meetings since 2001.

Still, the rate is higher than the benchmark federal fund rate target for overnight loans between banks, which was kept unchanged at 5.25 per cent.

'I think it's an intervention into the market place that is not justified,' said Dr Faber from Danang, Vietnam. Injecting more money into the system will 'create an additional set of problems at a later date', he said.

Global stock markets rallied as the Fed's move helped ease concern that a rout from the US mortgage market would spread. A global sell-off had erased more than US$5.5 trillion of market value from a July 23 peak.

'They're driven by asset markets, their policies, which is a mistake in the first place,' said Dr Faber, publisher of the monthly newsletter The Gloom, Boom & Doom Report.

The housing problems arose in the first place 'because of easy monetary policies'. Should the Standard and Poor's 500 Index drop below 1,400 points, the Fed is likely to reduce its benchmark overnight lending rate, Dr Faber said. If the S&P rises above 1,500 points, it would not cut the rate, he said. The S&P 500 climbed 2.5 per cent to 1,445.94 last Friday.

US stocks are at the beginning of a bear market in which benchmark indices may fall more than 30 per cent, he said earlier this month.

Dr Faber said yesterday that the dollar was not likely to 'collapse' as money flows to US currency and yen assets.

'I believe that US assets, while they will not make a new high, they will outperform assets in emerging markets for a while,' he said. 'There's a capital outflow from emerging markets into the US and into the yen.'

Dr Faber told investors to bail out of US stocks a week before the 1987 Black Monday crash. He correctly predicted in May 2005 that stocks would make little headway that year. -- Bloomberg