Fed Cuts Rates by 0.75%, Asian Markets Plunge

123jump.com Staff
22 Jan, 2008
New York City

The Federal Reserve Bank lowered interest rate by 0.75% to 3.5% to thwart the economy from sliding into a recession. The Fed cited weakening economy and increasing downside risk to growth. The Fed lowered rate ahead of its two-day meeting schedule at the end of this month shows the gravity of the situation. Globla markets in the last two days have lost between 10% and 15%. European markets rallied after the news but Asian markets closed down between 5% and 8% for the second day in a row.

[R]9:00AM New York – The Federal Reserve cut rate by 75 basis points to 3.5%. Asian markets plunge for the second day.[/R]

The Federal Reserve cut interest rate by 75 basis points to 3.5% after global markets plunged for the second day in a row. The Fed moved in anticipation to halt the economy from sliding to recession may have a limited impact in the long term.

“Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.

The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully. Appreciable downside risks to growth remain”, The Fed added in the press release.

In a related action, the Board of Governors approved a 75-basis-point decrease in the discount rate to 4%.

Interest rate cuts are blunt financial instruments and the Fed is quickly running out of options. The Fed action, in an emergency session, focused on the risk to the economic growth and appears to have taken into account global market decline. The precipitous decline in Europe, Asia, and emerging markets prompted the Fed to take a quick action.

The real question now is what happens if the rate cuts do not work and the Fed runs out of the option.

Global markets were on the decline for the second day of this week. Asian markets fell sharply for the second day in a row as investors sold stocks on the fears of U.S. recession and volatility in the commodities prices.

In Tokyo Nikkei 225 Index closed lower 752.89 or 5.65% to 12,573.05, in Hong Kong Hang Seng index decreased 2061.23 or 8.65% closed to 21,757.63, in Australia ASX 200 index declined 393.60 or 7.05% to close 5,186.80.

In South Korea Kospi Index decreased 74.54 or 4.43% to close at 1,609.02, in Thailand SET index closed lower 24.99 or 3.26% to 741.54, and Indonesia JSE Index edged decreased 191.36 or 7.70% to 2,294.52. Sensex index in India decreased 875.40 or 4.97% to 16,729.94.

Sentimental markets appear to be in the grip of fear as major indexes in Asia are now trading between two and five-year lows. Nikkei 225 in Japan is now near 27-month low. Export sensitive stocks in Japan are reaching recent lows with Toyota Motor, Honda, Nissan, Sony, and Cannon, down between 15% and 30% from their recent peaks. Banks, brokerage companies and shipping companies have been the hardest in this on-going sell-off. Construction slowdown after the new building code has also hurt real estate companies.

Hong Kong fell 8.7% today after losing 5.5% on Monday. Banks, insurance, and properties companies were leading decliners. Bank of China is likely to report a larger than estimated loss related to sub-prime market. The surprise estimate of subprime related loss from Societe General, which has still not been reported, hurt the sentiment in China and Hong Kong. HSBC has been on the decline in Hong Kong trading on the worries that the bank may not have a handle on the depth of its sub-prime losses. Ping An Insurance fell 12% after it carried out a bond offering to accumulate capital and hunt for asset acquisition.

India has witnessed one of the worst two-day sell-off. The lack of liquidity and international investors selling in the global sell-off has created dramatic swings in the market. Sensex index dropped 5% after losing 7.5% on Monday. The market was halted after one minute of opening and fell quickly 12% in the morning trading before recovering to close down only 5%. The Reliance Power IPO has sucked capital from five million retail investors. Banks, auto companies, steelmakers, and brokerage companies traded sharply lower.

European markets in the late afternoon are trading lower as well and Germany has led the decline in the region. Germany fell another 5% at the opening. European markets regained most of the losses after the Federal Reserve cut the rate by 75 basis points to 3.5% but markets have remained on the edge.