[FoRK] Fed Makes Emergency 0.75% Rate Cut

[Eugen Leitl]

(that's not it, not yet)

http://www.nytimes.com/2008/01/22/business/worldbusiness/23cnd-asiastox.html?_r=2&hp=&oref=login&pagewanted=print

January 22, 2008

Fed Makes Emergency 0.75% Rate Cut

By KEITH BRADSHER and DAVID JOLLY

The Federal Reserve, responding to an international stock sell-off and the
likelihood of a sharp drop in America on Tuesday morning, cut its benchmark
interest rate by three-quarters of a percentage point.

The Federal Open Market Committee lowered its target for the federal funds
rate on overnight loans between banks to 3.5 percent, from 4.25 percent.

In a statement, the Fed said: “The committee took this action in view of a
weakening of the economic outlook and increasing downside risks to growth.
While strains in short-term funding markets have eased somewhat, broader
financial market conditions have continued to deteriorate and credit has
tightened further for some businesses and households.”

“Moreover,” the statement continued, “incoming information indicates a
deepening of the housing contraction as well as some softening in labor
markets.”

In a related action, the Fed approved a 75 basis-point decrease in the
discount rate, to 4 percent.

Within minutes after the announcement, trading in stock-index futures, which
had been presaging a deep slide on American stock exchanges Tuesday, retraced
much of their earlier declines, which had been driven by a second sour day in
Asia and Europe.

Stock markets across Asia plunged even farther and faster on Tuesday than
they had on Monday, as anxious sellers dumped huge numbers of shares on
worries that an economic slowdown in the United States could drag down growth
around the world.

The European stock markets initially followed their Asian counterparts lower,
plunging at the opening and then see-sawing back and forth in frenzied
trading as investors looked to the start on Wall Street for direction. After
the Fed announcement, they had made up those losses and moved into positive
territory. But the rate cut was too late for Asian markets, which had already
closed.

A decade after a credit crisis in Southeast Asia triggered an “Asian
contagion” of stock market declines around the world, the credit crisis in
the United States is now producing an “American contagion” to which no stock
market seems immune.

Heavy selling hit each Asian and European stock market as soon as it opened.
Some of Asia’s easternmost exchanges, which had closed on Monday before the
sharpest declines occurred in India and then Europe, suffered particularly
steep drops.

The Japanese stock market dropped 5.7 percent, for the worst two-day loss in
17 years, while the Australian stock market tumbled 7.1 percent, its worst
single-day loss in nearly two decades. The Shanghai market lost 7.2 percent
while the Hang Seng index in Hong Kong plummeted 8.7 percent.

“At this stage, you can say there is panic selling in the market,” said Kwong
Man Bun, the chief operating officer of KGI Asia Ltd., a large Asian futures
broker. “We don’t think the Hang Seng index has found its bottom yet; the
index will continue to go down and will only find its bottom when external
markets — namely, the U.S. market — stabilize.”

Jane Coffey, head of equities at Royal London Asset Management in London,
said there was some sense that the sell-off in global markets might have been
overdone on Monday. She said the partial recovery in Europe in the late
morning had been in part fueled by the possibility that the Federal Reserve
could act to cut interest rates, perhaps before the open on Wall Street, and
that prediction was borne out. One of the biggest losers on Monday and again
on Tuesday was India. Trading on the Bombay Stock Exchange was halted for an
hour on Tuesday after the Sensex index dropped 11.5 percent shortly after the
opening.

Finance Minister P. Chidambaram of India tried to soothe markets with a news
conference. “My advice to investors is to stay calm,” he said, adding that
India’s economy was slated to grow 9 percent this year and 8.5 percent next
year.

Investors did not immediately heed his words, though, and when the market
reopened the Sensex fell to more than 12 percent below Monday’s close. But
the market rebounded sharply in the afternoon to show a loss of 5 percent.

Across the Asian region, government officials and economists alike blamed the
selling on worries about the United States economy, while expressing
lingering hopes that the region’s economies would not suffer quite as much in
the months ahead as the American economy. Markets in the United States were
closed on Monday for the observance of Martin Luther King’s Birthday, but
will open Tuesday morning.

“The prospects for ongoing growth in Asia and the developing markets are
assisting us to withstand the fallout occurring elsewhere,” said Wayne Swan,
Australia’s federal treasurer. He blamed the broader market decline on
continued worries about the full scope of problems stemming from losses on
subprime mortgages in the United States.

But some economists are much gloomier, and question whether Asia’s fortunes
have really “decoupled” from the United States at all.

“Asian, including Southeast Asian, economies, will slow as a result of
weakening economic growth in the U.S. and Europe,” said Yiping Huang, the
head of Asia and Pacific economic and market analysis at Citigroup.

He added that he did not believe that Asian economies had decoupled at all
from the American economy, because so many companies now have closely
integrated operations around the world.

The breadth of the selling on Tuesday reflected worries that Asian economies
would not escape unscathed. While trade within Asia has expanded rapidly over
the past decade, much of it still consists of raw materials and components
that are shipped among countries before final assembly, usually in China, and
then exported to the United States or the European Union.

While the European Union overtook the United States as China’s largest export
market early last year, there have been growing signs this month of a
possible economic slowdown as well in Europe. European banks have also
sustained heavy losses on mortgage-backed securities from the United States,
and the regions exports are starting to face difficulty from the strength of
the euro.

Some economists maintain that China, with 11.5 percent economic growth,
actually needs the slower pace of exports that an American economic slowdown
would bring. Weaker exports would help the Chinese economy avoid overheating,
they contend, and prevent further increases in inflation, which hit 6.9
percent at the consumer level in November.

“A U.S. recession is good for the Chinese economy,” Qing Wang, an economist
in the Hong Kong office of Morgan Stanley, said in a telephone interview
after the close of most Asian trading on Tuesday.

Mr. Huang at Citigroup was more pessimistic about the effect on China of
slower exports. “Sharp slowing of external demand could in fact lead to
overcapacity, margin squeeze and deflationary pressures in China,” he said in
an e-mail message.

For the rest of Asia, an American recession could pose a serious problem —
particularly southeast Asia, which has never fully recovered from the Asian
financial crisis in 1997 and 1998. Indonesia’s stock market in Jakarta
plunged 9.22 percent on Tuesday.

Stockbrokers said that investors were selling heavily for many reasons. Some
individuals had to raise money to meet margin calls because they had
purchased shares with borrowed money, while some fund managers dumped shares
to raise money to meet redemption requests from their investors, said Peter
Lai, the securities sales director in the Hong Kong office of DBS Vickers, an
Asian retail brokerage.

Fears of what will happen when American stock markets open for trading on
Tuesday contributed to the weakness in Asia,

“With the U.S. markets out, there was just nothing to act as a brake on the
Japanese market, “ said Kazunori Takahashi, head of equity market research at
Daiwa Securities SMBC in Tokyo. “The market just spiraled downwards.”

Futures contracts traded in Asia suggested growing expectations through the
day that losses in New York will be severe.

“Definitely this is detrimental to the sentiment of the whole market,” Mr.
Lai said.

Keith Bradsher reported from Hong Kong and David Jolly from Paris. Tim
Johnston contributed reporting from Sydney, Heather Timmons from New Delhi,
Martin Foster from Tokyo and Graham Bowley and Michael Grynbaum from New
York.