Translated material
Surgeon Bernanke
The Fed urgently cut the discount rate
The financial crisis that broke out in the world due to problems with American mortgages forced the US Federal Reserve to take emergency measures. On Friday, the Federal Reserve urgently reduced the discount rate (at which it provides resources to banks) from 6.25 to 5.75%, while the base interest rate (the benchmark for the interbank market) remained at 5.25% per annum. Investors regarded this decision as evidence that the Fed is ready to quickly take measures to reduce risks. As a result, American stock indices opened higher, followed by Russian stocks. The RTS index rose by 2.2% to 1860 points. But, according to analysts, these measures may not be enough to stabilize the economy.“The policy rate cut was undertaken to reduce the gap between the lending rate and the benchmark federal funding rate to 50 basis points,” the Fed said in a statement (previously the gap was 100 basis points). “Financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty could keep the economy from moving forward.”
The Fed cut one of its interest rates on an emergency basis (that is, between meetings of the Open Market Committee) for the first time since 2001 and since Ben Bernanke became its head. The next committee meeting will take place on September 18. Mr. Bernanke finds himself in a difficult situation, but unlike his predecessor Alan Greenspan, whose opinion itself was the most important market factor, the new head of the Fed is, by and large, now only undergoing a test of strength. Over the past week, the Fed, in an effort to contain the crisis, provided more than $60 billion to the markets. At that time, Ben Bernanke's department acted in concert with other central banks. But changing the rate is his own anti-crisis measure. “A rate cut cannot completely solve the systemic problems of the American economy. Other measures are also necessary, in particular further provision of liquidity and tightening of prudential supervision in the field of mortgage lending,” Yaroslav Lisovolik, chief economist at Deutsche Bank, told Vremya Novostey.
Market participants do not rule out that in connection with the rate cut in the United States, the European Central Bank will also have to reconsider its plans regarding monetary policy. “Now the probability of raising ECB rates is no longer as high as previously thought,” Mr. Lisovolik believes. “The European regulator now has to not only solve the problem of inflation, but also take care of maintaining liquidity in the market.” “Investors now estimate the probability of an ECB interest rate increase in September at 40%, while two weeks ago it was 90%,” says Christoph Rieger of Dresdner Kleinwort in Frankfurt am Main.
Many experts believe that growing problems in credit markets are bringing the likelihood of a Fed rate cut closer. Due to a “significant deterioration in financial conditions,” the base rate could be reduced to 4.5% per annum as early as this year, Goldman Sachs analysts predict. In their opinion, the Fed will cut the rate by 25 basis points at a meeting on September 18 or even earlier. In October and December, the American central bank, according to the forecast of Goldman Sachs, will also lower the rate by 25 basis points each time. "We continue to expect credit and housing market problems to increase unemployment to levels that have in the past necessitated a reduction in the benchmark interest rate," the bank said in a statement.
Meanwhile, The Wall Street Journal notes that rumors have intensified in the market that the Fed has actually lowered the base rate. In recent days, the interbank rate was in a number of cases significantly below the Fed target level and even approached zero, the publication writes. "In our view, the Fed has changed policy," James Bianco, president of research firm Bianco Research, said in a letter to clients. -- Whether this is a temporary measure or a long-term change is unclear, but it is a fact that the Fed eased monetary policy last Friday. It allowed the real rate to move away from the target level.”
Thanks to the Fed's decision, American markets rose on Friday: the Dow Jones index rose 1.82%, the Standard & Poor's 500 rose 2.46%, and the NASDAQ rose 2.2%. “Market participants were very impatient for the regulator to do something, and they waited,” said Philippe Dow, managing director of brokerage corporation RBC Dain Rauscher. “The price charts went up, and it became clear that someone was taking care of the market.”
The Russian stock market managed to react to the Fed's decision on Friday. The RTS index rose by 2.22%, to 1860.70 points, and the MICEX index by 2.4%, to 1637.81 points. “In the first half of the day, depressed moods prevailed due to the collapse in the Japanese stock market,” says Promsvyazbank analyst Oleg Shagov. “The sharp rise in the RTS index was caused by the massive closing of short positions by players after a message appeared about the unexpected decision of the Fed.” According to the expert, the Fed brought stability amid emerging signs of the consequences of the mortgage crisis spreading to global monetary, stock and commodity markets and demonstrated to investors the determination of the monetary authorities to take prompt action.
Alexander Potavin, head of the analytical department of Antanta Capital Investment Company, points out that the Fed’s decision seriously affected the commodity markets, where a new wave of price growth has emerged in the industrial metals sector. “The August fall in Brent oil prices almost exactly repeats the movements of quotes on European stock exchanges. In our opinion, the coming week will see a strengthening of oil prices due to a weakening dollar, as well as problems with gasoline production due to a fire at Chevron’s largest refinery,” the analyst notes.
Despite the positive assessment of the Fed's actions, market participants believe that this is not enough to solve the problems. "The tension in the system hasn't really eased," said Hartford Investment Management Co. managing director. Hugh Wheelan.