Fed leaves rates steady

No surprise here. As expected, the Federal Reserve left interest rates near zero and said that the world's largest economy is well on the path to recovery. The only major worry is that the current weakness in the job market could continue for a while. The FOMC kept its federal funds rate, an overnight lending rate that guides rates on various consumer and business loans, in a range of 0% to 0.25%. Rates have been at that level since December. "Economic activity has picked up following its severe downturn. Conditions in financial markets have improved further, and activity in the housing sector has increased," the Federal Open Market Committee (FOMC) said at the end of its two-day meeting. It was the first time since August 2008 in which the FOMC said that the US economy has improved from its previous meeting. The Fed reiterated that current economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

Separately, the Fed and US Treasury said they are scaling back emergency programs aimed at combating the worst financial crisis since the Great Depression. The US central bank said it will further shrink auctions of cash loans to banks and Treasury securities to bond dealers, reducing the combined initiatives to US$100bn by January from US$450bn. The Treasury has begun the process of exiting from some emergency programs, the chief of the government’s US$700bn financial-rescue fund said separately. In its policy statement, the Fed said it will complete its planned US$1.25 trillion in purchases of mortgage securities and extended the end-date of the program to March from December.

Fed cuts rates…can it drop below 1%

The Federal reserve dropped key interest rate from 1.5% to 1% in a bid to boost economic growth and increase the availability of credit. This cut follows a 50-basis-point reduction earlier in the month. The Fed’s statement points to tight credit amid market turmoil, as well as declines in consumer spending, business equipment spending, and industrial production. The Fed also expressed a new concern about weakened economies abroad "damping the prospects for U.S. exports." The big question is whether rates can go below 1%? The last time rates were at 1% was between June 2003 and June 2004.

…So does China, South Korea

China’s Central Bank cuts deposit lending rates by 27bps to 6.66% from 6.93%, the People's Bank of China stated on its web site. The deposit rate drops to 3.60% from 3.87%. This is the third time in two months China has cut rates.

Bank of Korea lowered the seven-day repurchase rate to 4.25%. This is the largest-ever rate reduction following last week`s carnage in stock and currency markets. Bank of Korea Governor Lee Seong Tae lowered the seven-day repurchase rate by 75 basis points to 4.25%. This was the largest-ever rate reduction in its history, following a more than 20% decline in South Korean shares in the past week. Bank of Korea also cut rates on special loans for small and medium-sized companies to 2.5% from 3.25%, the central bank said. It will also accept bonds issued by commercial banks as collateral in its money-market operations.

…And Bank of Japan too cuts rate

The Bank of Japan cut its benchmark interest rate to 0.3%. The deciding vote was cast by Governor Masaaki Shirakawa to lower the key overnight lending rate from 0.5 % to 0.3%. Four of the eight board me

Fed cuts rates, hints at a pause

The Federal Reserve on Wednesday cut interest rates by a quarter point to 2 per cent and hinted at a likely pause at its next policy meeting in June.

However, the US central bank was careful not to suggest that it thinks the rate-cutting cycle is necessarily over, and left open the option of cutting rates in June, or resuming rate cuts later in the year if required.

The Fed decision followed new data that suggest that the US economy grew 0.6 per cent in the first three months of this year, avoiding outright contraction due to a build-up in business inventories and continued support from exports.

But real final sales (excluding inventories) declined as investment fell and consumption slowed, suggesting that underlying demand may not be enough to support continued expansion.

The report revived the debate as to whether the US is in recession.

Richard Yamarone, director of research at Argus Securities, said "claiming recession while economic output is expanding is like diagnosing a patient with the sniffles as having pneumonia".

But John Ryding, chief US economist at Bear Stearns, said "the fact that there was technical growth in GDP in no way alters our view that the economy has fallen into recession".

The official verdict will be made by the National Bureau of Economic Research. It puts "considerable weight" on GDP, but uses measures such as employment and income as well.

Many analysts believe the economy will probably contract in the second quarter as companies cut back on inventory.

"The increase in inventories is likely unintentional: corporations were seemingly surprised by the cooling off in demand," said Drew Matus, senior economist at Lehman Brothers.

However, others argue that tax rebates will arrive just in time to boost consumer spending and keep second-quarter growth positive too.

Carlos Gutierrez, the US commerce secretary, said the report suggests growth will be "slower but positive" in the first half.

Real personal consumption increased at a 1 per cent rate in the first quarter — still positive, but the weakest growth since the second quarter of 2001.

Fed cuts rates by 75 bps

The Federal Reserve cut interest rates by three-quarters of a percentage point today. The stock market had anticipated a cut and the Dow Jones industrial average jumped over 300 points ahead of the announcement. But the Dow dropped about 100 from its high for the day after the Fed failed to cut rates by a full point, which many had expected.

The Fed`s target for the federal funds rate, the interest that banks charge each other on overnight loans, stood at 3 percent before the move, and was at 4.25 percent at the beginning of this year.

Markets posted strong gains before the Fed announcement after Lehman Brothers and Goldman Sachs reported better-than-expected results for the first quarter.

Federal Reserve Chairman Ben Bernanke and his colleagues have already been working overtime, employing a variety of novel approaches to keep the economy out of a recession or at least moderate the impact of any downturn.

Treasury Secretary Henry Paulson made the rounds of the morning TV shows Tuesday to underscore the administration`s commitment to keeping turmoil in the financial markets from worsening a struggling economy.

"The priority we have is a stable, orderly financial" market, he said on CBS` "The Early Show.

He said the focus of policymakers "is reducing the spillover into the real economy from the turbulence and disruptions in our financial markets."

To those who would complain that the administration is more interested in bailing out Wall Street than struggling homeowners, Paulson said the thousands of Bear Stearns employees likely to lose their jobs and life savings, and thousands of shareholders who have lost billions because of the company`s collapse, probably do not feel like they have been bailed out.

A cut in the funds rate will translate immediately into lower rates for consumers and businesses as banks cut their prime lending rate by a similar amount.

"There is no reason for the Fed not to be aggressive," said Mark Zandi, chief economist at Moody`s Economy.com. "The economy is in a recession, the financial system is in disarray and inflation is low."

However, a report Tuesday showed that wholesale prices rose by 0.3 percent in February, driven higher by rising energy costs.

Outside of food and energy, core inflation jumped by 0.5 percent, the biggest increase in 15 months and a possible sign that the relentless increase over the past two years in energy costs is making its presence felt in other sectors of the economy.

At the moment, Fed officials have said they are more concerned about weak growth than inflation. Another report Tuesday showed that problems in the housing industry continue, with construction of new homes falling by a bigger-than-expected 0.6 percent and applications for new building permits dropping to the lowest level in 16 years.

Fed cuts rates again

The Federal Reserve on Wednesday cut a key interest rate for the second time in just over a week, reducing the federal funds rate by a half point. It signaled that further rate cuts were possible.

The Fed action Wednesday pushed the funds rate to 3%. It followed a three-fourths of a percentage point cut on Jan 22, a day after financial markets around the world had plummeted on fears that the US economy was heading into a recession. That decrease had been the biggest one-day move in more than two decades.

The half-point cut Wednesday followed news that the economy had slowed significantly in the final three months of last year with the Gross Domestic Product expanding at a barely discernible pace of 0.6%, less than half what had been expected. The report came amid increased concern from several quarters about a possible recession. In a brief statement explaining their decision, Federal Reserve Chairman Ben Bernanke and his colleagues said that "financial markets remain under considerable stress."

The Fed move was approved on a 9 to 1 vote. Richard Fisher, President of the Fed`s Dallas regional bank, dissented, preferring no change in rates.

The rate cut marked the fifth time that the Fed has cut the funds rate since it started with a half-point cut on Sept 18 in response to the severe credit crisis which hit global markets in August.

The latest Fed action was expected to be quickly followed by cuts in banks` prime lending rate, the benchmark rate for millions of consumer and business loans. The Fed`s hope is that by making credit cheaper, it will encourage more borrowing, giving the economy a needed boost.

The Fed`s half-point move met expectations of financial markets and was a bolder move than the smaller quarter-point cut that many economists had been expecting.

BREAKING - FED CUTS RATES by 75 bps

The Federal Reserve, confronted with a global stock sell-off fanned by increased fears of a recession, cut a key interest rate by three-quarters of a percentage point on Tuesday, the biggest one-day move by the central bank in recent memory.

The Fed said it was cutting the federal funds rate, the interest that banks charge each other on overnight loans, to 3.5 percent, down by three-fourths of a percentage point from 4.25 percent.

The Fed action was the most dramatic signal it can send that it is concerned about a potential recession in the United States. It marked the biggest one-day move by the central bank in recent memory.

The Fed decision was taken during an emergency telephone conference with Fed officials on Monday night. Those discussions occurred after global financial markets had plunged Monday as investors grew more concerned about the possibility that the United States, the world's largest economy, could be headed into a recession.

Fed Cut Impact, Positive, Negative Sectors

Impact of fed rate cut

• Overall positive for emerging equity market due to increase in foreign institutional flows

- Liquidity concerns that emerged due to sub-prime crisis will get offset

• India to be among the out performers in the emerging markets

- Lower dependency on exports

- Domestic consumption growth remains intact (more so backed by good monsoon)

- High real interest rates

- RBI is in good position to counter any adverse developments with contained inflation

• Rupee to strengthen following dollar weakness

- Positive for FII in view of higher dollar return

- Negative for export oriented sectors

• Fed action more aggressive than the expectation highlights risk of US slowdown which will adversely affect global demand

- Commodities likely to see correction on the base of demand slowdown

We continue to recommend overweight on domestic consumption and infrastructure related plays and underweight on export oriented plays.

Our top picks are ITC, SBI, PNB, Bharti, L&T and DLF among large caps.

Positive for sectors

• Industrials/Infrastructure
• Financial services
• Real estate
• Telecom
• FMCG

Negative for sectors

• IT
• Textiles
• Auto components
• Metals

Neutral

• Health care
• Consumer discretionary
• Cement

Gold - Watch what Fed Does and not What they say

Gold - Watch what Fed Does and not What they say

Fed Rate - 25 or 50bps ?

Fed Rate - 25 or 50bps ?

US Home Sales, Fed Rates

Attached is a chart on major housing indicators for the US - housing starts, new home sales and existing home sales. At a trend level (measured by the 12mma of month-on-month growth), all three are de-growing. The sharpest de-growth is visible housing starts, the most closely tracked housing indicator.

The National Association of Realtors' forecast seems to suggest that existing home sales de-growth maybe close to its bottom, new-home sales are likely to witness a far sharper slowdown going forward.

The Fed has noted the cooling off in the housing market . In its March FOMC statement it noted that " Recent indicators have been mixed and the adjustment in the housing sector is ongoing." In its statement for May, to be released at 11:45 pm India time today, it is likely to reiterate the slowdown in the housing market. Rising asset prices had been a key concern for the Fed when it started hiking rates in 2003.