The US Federal Reserve on Wednesday cut interest rates by another 50bp to 3% and signalled possible further reductions. The move initially triggered a broad rally in stocks – the S&P 500 jumped 1.7% within 45 minutes of the announcement – only for markets in US and Europe to close lower. The dollar meanwhile fell to a record low against the euro before closing slightly higher. Asian stocks were mixed on Thursday. In a separate analysis, the FT says that a total of 125bp cuts in just 8 days has effectively killed the Fed’s old approach of gradualism and signals a new approach to monetary policy. The FT’s John Authers wonders, though, how much more it will take to convince the markets, while Lex concurs with – if not applauds – the Fed’s move. But other commentators criticised the rate cut as short-sighted in its determination to avoid recession at all costs. Writing in the FT, Ricardo Hausmann, of Harvard, says the US should “face its need for adjustment with courage and reason, not fear” and stop behaving as the “whiner of first resort, ready to waste all its dry powder on a short-sighted attempt to prevent a 2008 recession”. Full text of Fed statement here.

This entry was posted by Gwen Robinson on Thursday, January 31st, 2008 at 5:49 and is filed under Capital markets. Tagged with federal reserve. Edit this entry.