Shock as US slashes interest rates to 3.5%

By Jim Armitage
Updated: 11:48 EST, 22 January 2008

 

US shares fell steeply at the open on Wall St today, despite the shock 0.75% interest-rate cut from the Federal Reserve.

The staggering move, which slashed the base rate to 3.5%, was a desperate bid to shore up the global economy. But the market was unimpressed: the Dow Jones Industrial Average was down 441.7 points at 11,657.6.

It came after 48 hours of chaos on stock markets and was seen by some as a panic measure. Fed chairman Ben Bernanke said it took action in view of the 'weakening economic outlook and increasing downside risks to growth'.

Strains on the money markets had eased but the broader financial market conditions were deteriorating. Incoming information indicated the housing market in the US was continuing to get worse, as were the country's labour markets.

Wall Street's biggest forecasters are concluding that the US is falling ever closer to a long recession, and the last 48 hours of stock market turmoil is making the slide ever more likely.

Lehman Brothers today declared the US economy may be just 'one shock' away from recession, putting the odds at 40% that in the coming weeks the world's biggest economy will end its sustained bull run and start contracting. 'The odds may be edging higher as we speak,' said the bank's global chief economist Paul Sheard.

In many ways, Sheard is simply falling in line with the rest of Wall Street's finest minds. Goldman Sachs, Morgan Stanley and Merrill Lynch have already wielded the 'R' word.

Lehman's move to drop its forecasts in the past few days has nevertheless caused alarm in London. Before the shares wipeouts in recent sessions, Lehman put the chance of recession at one in three.

As if that was not enough to batter sentiment about the world's biggest economy, Bank of America this afternoon admitted profits crashed 95% in the fourth quarter after it booked at least $5.28bn of subprime mortgage-related writedowns.

BoA has attempted to do its bit to ease the banking crisis by agreeing to buy the country's mortgage basketcase Countrywide. However, after today's appalling earnings figures - coupled with the share-price rout among the banks this year - word is spreading that the bidder may get cold feet and walk away.

Last week was Wall Street's worst weekly performance since mid-2002. Appallingly for President George W Bush, that came despite his proposed $150bn fiscal stimulus package aimed at getting the US economy back up and running. The markets clearly have just one thing to say about that: 'It won't work.'

The problem with the package is that - even when combined with the monetary stimulus of big interest rate cuts, all but promised by Bernanke - it is unlikely to make Americans go out and spend when the global outlook is so shaky.

As Lehman's Sheard said today: 'We see the housing recession and the credit market dislocation continue to work their way through the economy. We see them as slow-moving shocks, a series of bodyblows that keep coming one after the other, rather than a knock-out punch.'

Crisis sends US banking giants' profits tumbling

Dreadful profit crashes at two of America's biggest banks today heightened the apocalyptic atmosphere on the global markets. Bank of America and Wachovia, the country's second- and fourth-biggest banks, reported eye-watering losses on subprime mortgage products - $5.28bn (£2.71bn) and $1bn respectively. BoA's profits crashed 95% to $268m for the final quarter of the year while Wachovia barely broke even after its profits slumped 98% to $51m.

The numbers were greeted with dismay by the markets, with the shares of both tumbling. To make matters worse, troubled bond insurer Ambac, which insures the bonds backed by subprime mortgage assets, reported its biggest-ever loss and said it was in emergency talks to shore up its finances.

Ambac was stripped of its triple A credit rating after fears that the assets it was insuring were rapidly becoming almost worthless, leaving it potentially liable for massive losses. Today it posted a $3.26bn loss after writing down the value of guarantees on subprime debt by $5.21bn. Ambac's shares gained 16% today amid concerns that it could have reported even worse figures. But it has lost 93% of its value in the past 12 months.

Get a round-up of stock market analysis and predictions...