Saturday, 18 August 2007

Fed to the rescue

The Federal Reserve cut its discount rate by 50 basis points to 5.75 percent yesterday, sending markets surging. Bloomberg reports:

Stocks in the U.S. and Europe rallied after the Federal Reserve unexpectedly cut the discount rate to ease a credit crunch. Crude oil, copper and gold advanced on reduced concern that the U.S. economy, the world's largest, would slow. Three- month U.S. Treasury bill yields leapt as the safe haven of government debt faded and the dollar fell versus the euro for the first time in a week.

The Standard & Poor's 500 Index rose 34.67, or 2.5 percent, to close at 1,445.94, while the Dow Jones Industrial Average increased 233.3, or 1.8 percent, to 13,079.08. The Nasdaq Composite Index gained 53.96, or 2.2 percent, to 2,505.03.

Some think this may soon be followed by a cut in the fed funds rate.

While today's action may not be enough to end the turmoil in the corporate and mortgage debt markets, traders and investors are betting that the Fed will cut the benchmark federal funds rate at its September meeting and then keep easing until the slump is over.

Here is one reason why:

Yields on asset-backed commercial paper rated A1, the second-highest at Standard & Poor's, and maturing the next day rose 39 basis points to 6.01 percent, the highest since January 2001, according to data compiled by Bloomberg. The increase is also the biggest since September 2001...

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