Fed Left Rates at 2%, Weak Economy Cited

123jump.com Staff
05 Aug, 2008
New York City

U.S. stocks rose sharply before the rate decision and extended their gains after the Fed left its key rate unchanged at 2%. The Fed suggested in the accompanying statement that economy is likely to remain weak for the rest of the year as credit remains tight, energy prices are at elevated levels and weakness in housing market persists. The Fed suggested that while commodities prices are high and are likely to remain volatile but inflation is likely to fall in the coming quarters.

[R]3:50PM New York – The U.S. Fed left its benchmark rate unchanged as it balances weakness in economy and mounting inflationary pressures.[/R]

The Federal Reserve left its key benchmark rate unchanged at 2% and indicated in the accompanying statement that tight credit market conditions, ongoing housing market weakness and elevated energy costs will weigh on the economy and on the consumer. The Fed statement appears to show a bias towards sustaining economic growth and less worried on the rising inflation.

The Fed also indicated that commodities prices are likely to be remain volatile but expects inflation to fall in the coming months. The Fed statement gave no indication to the value of the dollar and rising food and energy prices that most consumers face.

The Fed in a 10 to 1 vote decided to leave the rate unchanged and Federal Reserve Bank of Dallas President Richard Fisher dissented for the fifth time to increase rate. While Fed has been cutting rates for since last September from 5.25% and provided ample liquidity in coordination with central banks in Europe and Asia, weakness in the economy has persisted. In fact, many economists are worried that negative interest rate environment that we are currently in were present between late 2001 and 2003 and are largely responsible for the current malaise in the housing market.

The Fed left an impression that inflation is likely to be waning in the months to come as energy, metals and food prices decline. However, consumer price index in June increased at 5%, near two-decade peak. The Fed did not comment on the persistent and rising current account deficit and the health of the U.S. dollar.

The U.S. benchmark indexes extended their earlier gains after the rate decision and are trading at their best levels of the day. Benchmark indexes, Nasdaq, Dow and S&P 500 are up more than 1.5%, when only thirty minutes of trading left.

Procter & Gamble reported fourth quarter sales rise of 10% to $21.3 billion and earnings gain of 33% to $3 billon. Earnings per share increased 37% to 92 cents per share. For the year the company sales increased 9% to $83.5 billion and net income rose 17% to $12.1 billion. Earnings per share for the fiscal year rose 17% to $12.1 billion.

D.R. Horton, Inc, home builder reported third quarter revenues declined 40% to $1.4 billion from $2.5 billion a year ago. Net loss in the quarter was $399.3 million or $1.26 per share compared to net loss of $823.8 million or $2.62 per share, a year ago.

D.R. Horton, Inc ((DHI)) in the last one year traded as high as $19.10 in August 2007 and as low as $8.93 in July 2008. Based on the yesterday’s closing price the company has a market cap of $3.54 billion.

Airlines, transportation companies ad railroads edged higher as crude oil futures fell $1.66 a barrel to $119.75. In bond market trading 10-year bond traded at yield of 3.98% and 30-year bond traded at 4.59%.

Copper and lead in the metals trading fell 4% and 6% in the morning in New York. Cocoa, corn and soybean dropped 2%.

Asian Markets Review

The Nikkei 225 Index in Tokyo closed lower 18.52 or 01.14% to 12,914.66, Hang Seng index in Hong Kong decreased 565.17 or 2.51% closed to 21,949.75. ASX 200 index in Australia decreased 67.30 or 1.38% to close 4,820.40. The KL Composite index in Malaysia decreased 19.82 or 1.73% closed to 1,128.86.

The Kospi Index in South Korea decreased 7.51 or 0.49% to close at 1,535.54, SET index in Thailand closed lower 7.55 or 1.12% to 667.12 and JSE Index in Indonesia decreased 42.06 or 1.89% to 2,185.62. The Sensex index in India increased 383.20 or 2.63% to 14,961.07.

Europe Markets Review

In London FTSE 100 Index closed higher 134.50 or 2.52% to 5,454.50, in Paris CAC 40 Index increased 105.72 or 2.47% to close at 4,386.35 and in Frankfurt DAX index higher 168.89 or 2.66% to close at 6,518.70. In Zurich trading SMI increased 112.56 or 1.59% to close at 7,190.78.