Newspaper article The Journal (Newcastle, England)

Fed Expected to Do More to Bolster Optimism

Newspaper article The Journal (Newcastle, England)

Fed Expected to Do More to Bolster Optimism

Article excerpt

STOCK markets were given a boost after the US Federal Reserve cut rates by 0.75%, but the move was less than many had hoped for in the mounting economic gloom.

Markets had widely speculated that the Fed was preparing to deliver a 1% cut as the world's biggest economy struggled amid signs of a sharp downturn in the US and a deepening credit crunch.

The FTSE 100 index in London closed 3.5% up yesterday - soaring 191.4 points to 5605.8 - in anticipation of a dramatic rates move.

Shares on Wall Street's Dow Jones Industrial Average eased back after the rates decision, having rocketed more than 300 points at one stage, later standing about 200 points ahead.

Traders raised concerns that a cut of less than 1% could see the Footsie come under pressure again today as volatility remains high after the shock news of the rescue and cut-price sale of US bank Bear Stearns.

But economist James Knightley of ING Bank said the Fed had "more work to do" and was likely to trim rates again.

"Liquidity conditions and market sentiment will need to improve significantly to prevent the Fed having to come in and cut the Fed funds rate further," he said.

"Default risk and counterparty concerns will linger on and with further write-downs still probable, access to credit will continue to be constrained.

"This presents an ongoing risk to the economic outlook and so we expect the Fed to push the Fed funds target rate down to 1% in the coming months."

The gains made on the FTSE 100 saw it recover the bulk of the losses seen on Monday, when it fell by almost 4%, slumping to its lowest for more than two years.

Global markets shaken by the sale of Bear Stearns also took comfort yesterday in better-than-expected results from financial firms Lehman Brothers and Goldman Sachs.

Both companies posted first-quarter profits lower than last year, although their shares rose as results failed to fulfil the worst fears of analysts. …

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