01/22/2008 06:33 PM

Fighting Off Recession

Federal Reserve Slashes Interest Rates after Markets Crash

The Federal Reserve has cut interest rates in a surprise move to stave off recession in the US. Meanwhile markets around the world have had another bad day.

Stock prices fell sharply in China Tuesday.

Stock prices fell sharply in China Tuesday.

Monday was the worst day for the world's stock markets since the terror attacks of Sept. 11, 2001. It was clear that desperate measures were called for -- and that's exactly what the Federal Reserve, the US central bank, delivered.

The Federal Reserve slashed a key interest rate by three-quarters of a percentage point from 4.25 percent to 3.5 percent Tuesday, in the biggest interest rate cut since 1982. It is the third rate cut since September, and many analysts expect further rate cuts if stock markets do not recover.

However the move took markets by surprise. Many analysts had expected the Fed would wait until its meeting next week before cutting rates.

"The world's stock markets are in meltdown so the Fed came in … to try to stop the panic," Christoper Rupkey, senior economist at Bank of Tokyo-Mitsubishi, told the Associated Press. Other observers described the move as a sign of panic and a big risk.

The move came in reaction to crashes on stock markets around the world on Monday, fuelled by concerns about a possible global recession triggered by weaknesses in the US economy.

However the Fed's action was not enough to stop the Dow Jones industrial average from falling by 300 points in the first hour of trading Tuesday. US markets had been closed Monday due to a public holiday.

Other markets rebounded after the interest rate cut was announced. The UK's FTSE 100 index was up 2.8 percent while Germany's DAX, which had fallen over 7 percent on Monday, was only down by 0.3 percent on Tuesday.

The US government said Tuesday it was not ruling out taking extra measures if necessary on top of a $150 billion economic stimulus package, which was announced last week and is intended to prevent recession.

German Chancellor Angela Merkel Tuesday played down talk of an economic slowdown. "There is no reason to believe there will be a recession in Europe or in Germany," Merkel told NDR-Info radio. Her French counterpart, Nicolas Sarkozy, called for calm "in the face of the fallout from a financial crisis in the United States," and said efforts were needed to make the global financial system more transparent.

European Central Bank Executive Board member Jürgen Stark also sought to calm shaken nerves. "We have seen some excesses in the past and we are now in an ongoing process of market correction. We should not dramatize the situation," he said Tuesday in Brussels.

Swiss economist and businessman Klaus Schwab, who founded the World Economic Forum, also urged caution. "I don't believe that we are on the verge of a global recession," he told SPIEGEL ONLINE in an interview. "The world economy is much more broadly based than it used to be, through dynamic states like India and China … . The world has become less dependent on the prosperity of the US." The global economic turbulence is likely to be the main topic at the World Economic Forum, which begins in Davos, Switzerland on Wednesday.

Asia was also hit hard Tuesday. The Nikkei 225 Stock Average fell 5.7 percent to 12573.05, its lowest closing level since early September 2005. The Shanghai Composite index dropped over 7 percent, while Hong Kong shares fell by 8.7 percent in a record one-day fall.

On the Shanghai stock exchange, trading in Bank of China shares was suspended after the bank failed to comment on reports that it was planning large write-downs. Media reports suggest the bank may post a loss for 2007 as a result of its exposure to the troubled US subprime sector.

There was bad news too at the Bank of America, the second-largest American bank. The bank announced Tuesday that its fourth-quarter earnings had fallen by an enormous 95 percent. Net income at Bank of America fell to $268 million in the three months ended Dec. 31, down from $5.26 billion a year ago.



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