"The US is basically exporting its problems"

Louis Proyect lnp3 at panix.com
Sat Oct 17 06:36:51 PDT 1998


US rate cut fuels fears of recession

Financial Times, SATURDAY OCTOBER 17 1998

The dollar continued its dramatic slide against the world's leading currencies on Friday following Thursday's surprise quarter point cut in interest rates by the US Federal Reserve.

Most European stock markets finished ahead but off the day's highs as an initial surge of optimism in response to the cut gave way to fears that it underlined the threat of recession in western economies.

In New York, the Dow Jones Industrial Average, which had closed 330.58 up on Thursday night at 8,299.36, closed provisionally up 117.40, or 1.41 per cent, at 8,416.76.

The US dollar fell more than two pfennigs to DM1.612 on the expectation of further cuts in US interest rates before the end of the year.

It also fell against the Japanese currency by almost two yen to 115.40 yen to the dollar. It has depreciated by more than 10 per cent against the D-Mark and 15 per cent against the yen in recent weeks.

"The US is basically exporting its problems to Europe and Japan by weakening the dollar," said Stephen King, managing director of economics at HSBC Markets. "This increases pressure on the Germans and others to reduce their own interest rates or watch their currencies rise too strongly."

US and European stock markets were relatively volatile. Hong Kong's Hang Seng Index soared 8.99 per cent to close at 9,777.1, but other markets retreated from the strong gains made in the morning. In London, the FTSE 100 index of leading companies closed 1.52 per cent higher at 5133.1, well below its peak of 5,208 in the morning. Germany's Xetra Dax index closed 1.76 per cent up on the day at 4,469.12, while France's CAC-40 index was 0.83 per cent higher at 3,390.10 last night.

"A lot of people are worried about the fact that the Federal Reserve decided to cut interest rates without holding a meeting," said Phyllis Reed, an analyst at Barclays Capital.

"Some think that it could have been a panic measure because the Fed knows something no one else knows."

Alan Greenspan, the Fed chairman, ordered Thursday's cut in the federal funds rate immediately after consulting the Fed's policy-making committee, but the group took no formal vote, the Fed said yesterday.

Speculation focused on a possible bank failure or another US hedge fund collapse in the wake of the near bankruptcy of Long-Term Capital Management last month.

Worries were also expressed over the level of real interest rates in the US - the difference between inflation and nominal rates.

With inflation at just 1.5 per cent and the fed funds rate now at 5 per cent, real interest rates are still considered to be very tight.

"The Fed is going to have to loosen monetary policy very aggressively to stave off a recession in the US," said one analyst. The forward interest rate markets, which calculate expectations about future interest rate movements, are pricing another full percentage point reduction in US rates over the next few months.

Louis Proyect (http://www.panix.com/~lnp3/marxism.html)



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