- guardian.co.uk,
- Tuesday January 22 2008
The biggest single cut in US interest rates for more than two decades was not enough to avoid a wave of panic selling on Wall Street today, but helped London shares to claw back some of yesterday's losses.
The US Federal Reserve stunned the markets at 1.20pm with its 75 basis point cut to 3.5%, reacting to growing fears of a recession in the world's largest economy.
However it did not prevent a rush of selling when Wall Street opened an hour later. The Dow Jones Industrial Average plunged more than 400 points within minutes of the opening bell, a fall of almost 4%. Speculation that further cuts are imminent helped the index to recover somewhat to 11,924.6 by 4.30pm, a 1.44% fall.
The FTSE 100 experienced a volatile ride today, repeatedly flipping between gains and losses following yesterday's 5.5% plunge, the biggest fall since 9/11. A late rally meant it closed up 2.9% at 5740.1 points, a rise of 161.9 points.
David Buik of Cantor Index said the turnaround on the FTSE, which was nearly 240 points down in early trading, was remarkable.
"I've been witnessing scenes on the trading floor today that I've not seen in 40 years," he told Guardian Unlimited.
David Jones, chief market strategist at IG Index, said today was a day when "chaos reigned supreme" in the City.
The US interest rate cut, which came ahead of the Fed's scheduled meeting next week, is the biggest in more than two decades and follows steep stock market sell-offs around the world.
The US central bank said it had taken the action in view of a weakening economic outlook and increasing downside risks to growth.
"While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households," it said in a statement.
"Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labour markets."
It promised to act in a "timely" manner if needed.
The Federal Open Market Committee had been due to convene next week, but brought its meeting forward after stock markets plunged in Europe and Asia yesterday, when Wall Street was closed for a holiday.
"The Federal Reserve has clearly decided that events in equity and credit markets, as well as the recent deterioration of macroeconomic data required decisive action," said Rob Carnell of ING.
He believes that further US rate cuts are a strong possibility.
Economists were split on the merits of the move, with some calling it a mistake but others suggesting it would bring calm to the markets.
Today's cut is bigger than any single intervention during the 1987 stock market crisis. It is the biggest reduction since 1984 when interest rates were chopped by 175 basis points.
In the statement, the committee said it had voted 8-1 in favour of the cut with one member absent. The lone dissenter, William Poole, did not believe that current conditions justified the action, it said.
The cut may add to pressure on the Bank of England to cut rates when it meets next month. A Bank spokeswoman said this afternoon that it has no intention of bringing this meeting forward.
The surprise interest rate cut did nothing to boost commodity prices, though. Copper fell to a three-week low despite the cut, as fears over a US recession more than over-shadowed the Fed's decision. Nickel, zinc and lead also fell. Analysts are still counting on strong demand from China and India to offset potential losses from the US if a recession does kick in, but in the short term, commodities are still being hit by general negative sentiment worldwide. Gold, however, bounced back from earlier lows after the Fed's cut.
The Fed also made it cheaper for commercial banks to borrow money, by cutting the discount rate by 75 basis points to 4%.
Earlier, Asian stock markets fell sharply. Japan's Nikkei shed 5.7%, as fears over the impact of the weakening US economy grew.
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