Fed Cut Rates by another quarter point
By Eoin Callan in Washington and Michael Mackenzie and Daniel Pimlott in
New York
Kansas City , Missouri
, dissented from the decision. He preferred to leave rates unchanged in another signal that the Fed may be more hawkish than the markets might have hoped.
US
growth in the third quarter was its strongest since the beginning of last year, according to figures yesterday, which showed gross domestic product rose at an annual rate of 3.9 per cent in the three months to the end of September.
Published: October 31 2007 18:16 | Last updated: October 31 2007 19:46
The US Federal Reserve cut interest rates by a quarter point to 4.5 per cent on Wednesday, but warned investors against banking on further monetary easing, sending short-term government bond yields soaring.
The central bank signaled that it was shifting to a neutral stance on future rate cuts, saying “the upside risks to inflation roughly balance the downside risks to growth”.
However, one Fed governor, Thomas Hoenig of
”This should not be read as the Fed closing the door on easing, but they are signaling that the bar will be set quite high for them to cut at the next meeting,” said Alan Ruskin, chief international strategist at RBS Greenwich Capital.
The yield on the policy sensitive two-year note rose 12 basis points to a high of 3.92 per cent. Interest rate futures reflected sharply lower odds of further rate cuts when the FOMC meets in December or early next year.
The Fed is “telling you they’re on hold probably through December,’’ said Charles Comiskey, head of Treasury trading at HSBC. But investors continued to price in a high probability of a cut in rates to 4.25 per cent after the January meeting.
The dollar fell to a new record low of $1.4495 against the euro. Stocks were choppy after the Fed acted. The broad benchmarks briefly erased gains and fell into negative territory, but rallied after that. With an hour of trading left, the S&P 500 had risen 1.5 per cent from its low for the day.
The central bank predicted in its statement accompanying the decision that “the pace of economic expansion will likely slow in the near term” as the housing slump intensifies.
But it added that the second successive rate cut “should help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and promote moderate growth over time.”
The statement from the Fed played down expectations of future rate cuts, noting that while readings on ”core inflation have improved modestly . . . recent increases in energy and commodity prices” may put ”renewed upward pressure on inflation”.
This may reflect internal pressure from regional Fed presidents who fear that an over-reaction to the credit squeeze could let inflation out of the bag.
Disappointing earnings in the banking sector and downbeat corporate forecasts have added to concerns about a slowdown in activity, despite a strong overall economic performance last quarter.
“This one was for the banks. The cut is intended to keep money flowing freely and stem the risk of spillover from the financial markets to the real economy,” said Jeoff Hall, an economist at Thomson Financial.
The Bank of Japan also on Wednesday cited “uncertainties regarding overseas economies and global financial markets” as it held interest rates steady.