Jan 31 2008
Feds Cut Rate By 0.5% - USD Falls All Across The Board
Yesterday the greenback slipped sharply against most of the major currencies on the back of the news that the Fed has slashed the Fed Fund Rate and the Discount Rate by an additional 0.5%. The Federal Funded rate, which is the U.S inter-bank lending rate, was cut from 3.50% to 3.00%. While the Discount Rate, which is the rate at which U.S banks can borrow funds directly from the Reserve Bank, was slashed from 4.00% to 3.50%. The Fed has been continuously slashing the interest rate over the last few months in an attempt to stabilize the faltering U.S economy and to stave off a recession. Yesterday’s rate cut comes just over a week since the Fed surprisingly cut its benchmark lending rate by 0.75%, in order to stimulate the economy. This series of aggressive monetary expansion by the Fed will significantly boost U.S consumer spending, which will mean that the number of unsold U.S homes will decrease thereby alleviating the housing slump and loosening the persistency of the recent credit crisis. However the Fed will have to keep a close eye on future inflation figures, particularly since the recent Personnel Consumer Expenditure figure released above expectations. The PCE figure is not relied upon by many economists and therefore its is widely believed that inflation is not a major concern and that yesterday’s 0.50% rate cut was absolutely necessary in order to prevent the U.S economy from spiraling into recession. Inflation is expected to remain moderate in the near term, although there is a slight risk of it spiking on the back of the rate cuts. Nevertheless, stagflation is highly unlikely and it seems that the worst case scenario for the U.S economy will be a recession.
In other U.S news yesterday, the Annualized GDP quarterly figure released at 0.6%, which was well below the forecasted figure of 1.2%, giving further indication of slowing U.S economy. Also released yesterday was the ADP report, which has some predictive value for the Non-Farm Payrolls report which is to be released on Friday. The ADP report surprised on the upside, coming in at 130K and far-surpassing the expected figure of 40K. Therefore looking ahead, traders will now begin to shift their focus on Friday’s NFP report, which is usually a major market mover. The greenback may be able to pull back some lost ground on Friday as according to the ADP report we may see a positive surprise for the significant NFP report. Nevertheless, due to instability in the U.S financial markets coupled with slowing growth the short term outlook for the greenback remains very bleak. However we remain optimistic longer term and believe that towards the second half of 2008 the U.S economy will climb out of this deep pit and it will be accompanied by a sustained USD rally.
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