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Fed slashes rates in shock move Fed slashes rates in shock move
(about 2 hours later)
The US Federal Reserve has cut interest rates to 3.5%, a shock three-quarters of a percentage point reduction.The US Federal Reserve has cut interest rates to 3.5%, a shock three-quarters of a percentage point reduction.
The Fed, the US central bank, said latest figures indicated a deepening of the country's housing market slump and increased unemployment levels.The Fed, the US central bank, said latest figures indicated a deepening of the country's housing market slump and increased unemployment levels.
Global stocks rebounded with most European indexes closing higher, while Wall Street regained some ground.Global stocks rebounded with most European indexes closing higher, while Wall Street regained some ground.
One analyst said the Fed was "obviously panicked" by the threat of recession following Monday's global share slide.One analyst said the Fed was "obviously panicked" by the threat of recession following Monday's global share slide.
"Unfortunately they have no power to reverse what in my opinion is the worst post-war recession," said Michael Metz, chief investment strategist at Oppenheimer in New York."Unfortunately they have no power to reverse what in my opinion is the worst post-war recession," said Michael Metz, chief investment strategist at Oppenheimer in New York.
'This is huge' The Fed's interest move came as a complete surprise, as it was taken a week before its rate-setting Open Market Committee meeting scheduled for 29 and 30 January.
The Fed's interest move came as a complete surprise, as it was taken outside its timetabled rate-setting Open Market Committee meetings. It came after huge declines in shares across Asia and Europe on Monday, with London's benchmark FTSE 100 suffering its biggest one day fall since the terrorist attacks of 11 September 2001, gripped by fears of a US recession.
Cautious reaction
Cautious optimism greeted the Fed's action, stemming heavy falls on the European and US stock market indexes.
The UK's FTSE 100 index closed 2.9% higher at 5,740.1 after falling more than 4% earlier. France's Cac also bounced back but Germany's Dax closed 0.3% down.
The markets themselves now threaten to exacerbate the very downturn of which they are so scared Read Evan Davis's blogStocks rebound on rate cutThe markets themselves now threaten to exacerbate the very downturn of which they are so scared Read Evan Davis's blogStocks rebound on rate cut
In the US, trading on the Dow Jones and S&P 500 indexes were still down, but not as sharply as when they had first opened.
"We're not out of the woods yet... we're still down on the day... but clearly the Fed rate-cut move was well received by traders," said Michael James, senior trader at Los Angeles-based investment bank Wedbush Morgan.
"At least it was an attempt by the Fed to get in front of the negativity."
'This is huge'
The last two such emergency cuts were on 17 September 2001, shortly after the attacks of 11 September, and on 3 January 2001, in the wake of the dotcom bust.The last two such emergency cuts were on 17 September 2001, shortly after the attacks of 11 September, and on 3 January 2001, in the wake of the dotcom bust.
The last time the Fed cut rates as much as three-quarters of a percentage point was in August 1982, almost 26 years ago.The last time the Fed cut rates as much as three-quarters of a percentage point was in August 1982, almost 26 years ago.
What if, after the Bernanke bounce, stock markets continue to fall? Read Robert Peston's blogQ&A: Stock market falls
"This is huge," said the BBC's business editor Robert Peston."This is huge," said the BBC's business editor Robert Peston.
"And it is a big risk. If this doesn't work, then people will say they have nothing left in their locker.""And it is a big risk. If this doesn't work, then people will say they have nothing left in their locker."
"The Fed is spooked by the markets, so no wonder the Fed felt it needed to take drastic action," said the BBC's economics editor Evan Davis."The Fed is spooked by the markets, so no wonder the Fed felt it needed to take drastic action," said the BBC's economics editor Evan Davis.
"Even if it isn't going to work as well as it did in 2000 [in response to the dotcom crisis], it might at least prevent markets and the economy driving themselves ever deeper in to a quagmire.""Even if it isn't going to work as well as it did in 2000 [in response to the dotcom crisis], it might at least prevent markets and the economy driving themselves ever deeper in to a quagmire."
Analyst Jeremy Stretch of Rabobank, described the Fed's move as "a sign of panic".Analyst Jeremy Stretch of Rabobank, described the Fed's move as "a sign of panic".
What if, after the Bernanke bounce, stock markets continue to fall? Read Robert Peston's blogQ&A: Stock market falls
"But it certainly indicates that the Federal Reserve wants to be seen as taking action over the concerns of an economic downturn," he said."But it certainly indicates that the Federal Reserve wants to be seen as taking action over the concerns of an economic downturn," he said.
Yet despite the Fed's extensive cut in rates, US investment bank Merrill Lynch said at the start of this month that, in its opinion, the American economy was already in recession.Yet despite the Fed's extensive cut in rates, US investment bank Merrill Lynch said at the start of this month that, in its opinion, the American economy was already in recession.
Another investment bank, Goldman Sachs, has also warned that recession is now likely.Another investment bank, Goldman Sachs, has also warned that recession is now likely.
Sub-prime woesSub-prime woes
The sharp downturn in the US economy has centred on the slump in the American housing market over the past year.The sharp downturn in the US economy has centred on the slump in the American housing market over the past year.
Against a backdrop of higher US mortgage rates, home loan defaults and repossessions hit record levels last year, specifically in the sub-prime sector.Against a backdrop of higher US mortgage rates, home loan defaults and repossessions hit record levels last year, specifically in the sub-prime sector.
REMEMBER BLACK MONDAY? See past UK booms and bustsReactions to the rate cutREMEMBER BLACK MONDAY? See past UK booms and bustsReactions to the rate cut
This industry specialises in higher risk loans to people on low incomes or those with poor credit histories.This industry specialises in higher risk loans to people on low incomes or those with poor credit histories.
As the sub-prime mortgage sector hit crisis point, it triggered record losses at some of America's largest banks.As the sub-prime mortgage sector hit crisis point, it triggered record losses at some of America's largest banks.
It also caused the global credit squeeze, as much of this sub-prime debt was repackaged into wider debt offerings that were bought by banks and other investors around the world.It also caused the global credit squeeze, as much of this sub-prime debt was repackaged into wider debt offerings that were bought by banks and other investors around the world.
As a result, global banks are now much less willing to lend to each other, or to homes and businesses, until the full extent of the sub-prime exposure is known.As a result, global banks are now much less willing to lend to each other, or to homes and businesses, until the full extent of the sub-prime exposure is known.