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Thu, Dec 13, 2007 - Page 10 News List

Markets reel at Fed's disappointing cut

FED FUNDS RATE The Fed's 25-basis-point rate cut dealt a blow to expectations of a larger reduction to help the economy recover from a housing slump and tight credit


Disappointment at the US Federal Reserve's modest 25 basis point cut in interest rates dented Asian stocks yesterday, but expectations of further Fed action helped limit losses and boosted demand for government bonds.

Base metals fell with zinc hitting its downside limit in Shanghai, while oil slipped toward US$89 a barrel as investors fret that slower economic growth would hurt demand. Gold steadied above US$800 an ounce after Tuesday's fall.

US Fed Chairman Ben Bernanke and all but one of his colleagues agreed to trim the federal funds rate by a quarter of a percentage point to 4.25 percent on Tuesday, disappointing many who had expected a bolder half-point move to help cushion the world's biggest economy from a deep housing slump and tight lending conditions.

The rate reduction, the third this year, was needed to energize US economic growth, Fed officials said.

``Economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks,'' the Fed said in a statement explaining its decision to cut rates again.

The 9-1 decision for a quarter-point reduction to the funds rate was opposed by Eric Rosengren, president of the Federal Reserve Bank of Boston. He preferred a bolder, half-percentage point cut.

"The Fed's language clearly reflects a heightened degree of concern about the economic outlook," said Carl Tannenbaum, chief economist at LaSalle Bank. "They left open the possibility of additional rate reductions."

If the economy were to take a turn for the worse, another rate cut could come before the Fed's next scheduled meeting on Jan. 29 to Jan. 30, Tannenbaum predicted.

Asian stocks fell sharply at first yesterday, but later pared losses as investors bet there would be more Fed cuts in the months ahead. The majority of Wall Street dealers expect another rate cut next month, a Reuters poll found.

"There's a sense that the Fed could move again in January, which is giving the market some support," said Takahiko Murai, equities general manager at Nozomi Securities.

Tokyo's Nikkei average ended down 0.7 percent, after falling as much as 2.1 percent, while MSCI's measure of other Asia Pacific stocks shed about 1.6 percent by 0611 GMT.

The Asia Pacific index is down 8.5 percent from the Nov. 1 peak, but still up 36.2 percent this year, outstripping an 11.6 percent rise for MSCI's key world stock index

Already buoyed by flight to safety, safe-haven government bonds rose further as the market priced in easier monetary policies, pushing yields lower.

The yield on the benchmark 10-year JGB dropped 6.5 basis points to 1.515 percent. US Treasuries paused in Asia after posting their biggest rally in more than three years on Tuesday after the Fed decision.

Financial stocks were off their lows, with some ending slightly firmer on hopes of more rate cuts.

Australia's top investment bank Macquarie Group and South Korea's Shinhan Financial Group both fell more than 1 percent, but Kookmin Bank ended flat while National Australia Bank climbed 0.6 percent.

South Korean stocks were helped by rumors, later confirmed, that the government was buying local shares in the market.

Exporters or firms with large exposure to the US economy also pared early losses, but still remained pressured on lingering worries about the health of the region's top export destination.

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