Mumbai:
The Federal Reserve''s Open Market Committee is likely to announce an interest
rate cut on Tuesday, to ward off a downturn in US economic growth capped off by
a surprising drop in US jobs in August. But the extent to which the rates may
drop and how fast is yet uncertain. The
Fed policy-making body is expected to lower its target for the overnight federal
funds rate by either one-quarter or one-half percentage point from the current
5.25 per cent. The
rate cut, expected to be announced tomorrow, would be the first since June 2006
and the first under the leadership of Ben Bernanke, who took over from Alan Greenspan
as Fed chairman in February last year. The
prospects for a return to sub-par growth after a strong second quarter have even
raised the spectre of recession in the US. While economists disagree on the probability
of a downturn, they agree that risks have risen. In
Paris, US treasury secretary Henry Paulson acknowledged that bad lending practices
were at fault in the crisis triggered by defaults on US mortgage debt, but defended
innovative lending practices. "The
whole world, including the US has benefited from innovative financing techniques
- innovations like securitisation and credit availability," he told a joint
news conference with French economy minister Christine Lagarde. Some
analysts think the Bernanke Fed, whose approach to policy changes seems more deliberative
and model-driven than the approach taken by Greenspan, is already behind the curve. Financial
dealers are also split on how the Fed will act, even as some Fed officials have
suggested dramatic action may be warranted to offer quick support to a faltering
economy. Others
have been more cautious, stressing the economy''s resilience and the importance
of not taking unneeded steps that would bail out market participants who have
taken a bath with investments tied to sub prime mortgages. Regardless
of the outcome of Tuesday''s meeting, markets anticipate more rate cuts ahead.
Futures
contracts measuring expectations for Fed policy suggest benchmark overnight rates
will be near 4.5 per cent by year''s-end, three-quarters of a point, or 75 basis
points, below their current level, and close to 4.25 per cent by mid-2008. Fed''s
policy tilt is usually followed by a series of rate moves, although the size and
speed of subsequent shifts in credit costs can vary. Since
the late 1980s the average reduction in the target rate in an easing cycle has
been about 175 basis points, a figure skewed by the 550 basis points reduction
seen in 2001 through 2003, according to analysts.
also see : General
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