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Federal Reserve loosens credit to banks and markets react positively

Friday, August 17th 2007 - 21:00 UTC
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World markets on Friday reacted firmly back to positive following the Federal Reserve announcement that it would cut the rate at which it lends banks to inject more liquidity into the financial system

In a short statement the Federal Reserve said the risk to economic growth in the US had "increased appreciably" and anticipated it was slashing the interest rates it offers to financial institutions around the US by 50 basis points, to 5.75%, and that it would also accept as collateral for those loans the distressed home mortgages that have led to the current crisis. It would also extend the length of repayment for the loans. While it kept the more closely watched Federal Funds rate unchanged at 5.25%, market players immediately started betting that rate would also be cut soon, probably ahead of the Fed's meeting next month, given the surprisingly stark warning issued last night. "Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward. In these circumstances, although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably. The Committee is monitoring the situation and is prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets", said the Fed. The intervention had the desired effect with European stock markets soaring and Wall Street rocketing more than 300 points in the first minutes of trading, although it quickly pulled back and was 150 points higher in the morning session. Earlier this month, the Fed continued to maintain that the risk to the economy was inflation but in its latest statement said the cut in commercial interest rates came because the "downside risks to growth have increased appreciably". The Fed's actions came despite the hundreds of billions of dollars central banks around the world have injected into the credit markets, which underpin a host of consumer transactions, from credit cards to home mortgages. At the end of the day London's FTSE 100 jumped 3.5% or 205.3 points to 6,064.2; Frankfurt's Dax was up 1.49%, while the Cac 40 in Paris closed 1.86% higher. However all three main European indexes had veered in and out of the red throughout the day's trading. The European share recovery followed big falls on Asian stock markets. Japan's Nikkei declined 5.42%, its biggest points fall since April 2000, while Hong Kong's Hang Seng closed 1.38% lower. The Bank of Japan injected 1.2 trillion yen (10.7 billion US dollars) into money markets, which was its third intervention of the week. Japanese investors are worried that a slowdown in the US economy will hit exports from Asia. There is also speculation that the Bank of Japan could raise interest rates next week, despite the problems on the market. Elsewhere, the Australian central bank intervened to support its currency for the first time for six years. The Australian dollar was facing its biggest one-day fall against the US dollar since it was allowed to trade freely in 1983.

Categories: Economy, United States.

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