Confirming speculation that the Federal Reserve may cut interest rates before their next official meeting scheduled for 28-29 October, it was announced Wednesday that rates would be cut by 50 basis points to 1.50 percent. While welcoming the news, investors remain wary about the effect this will have on U.S. stock markets and the economy. In what has been termed as a “coordinated emergency rate cut”, similar interest rate cuts were made in the U.K., China, Canada, Switzerland and Sweden, as well as by the European Central Bank.
World leaders are hopeful that, together with the financial sector bailouts taking place in the U.S., U.K. and parts of Europe, the emergency interest rate cuts would help restrain the widening financial crisis. However, Wednesday proved to be yet another disastrous day on global stock markets, with the Tokyo stock exchange closing 9.38 percent down, European markets being hit with losses of up to eight percent, and a 5.18 percent fall recorded for on the FTSE 100 – a market cap weighted index for stocks traded on the London Stock Exchange. Following a day of volatility on Wall Street, the Dow Jones closed 2 percent down, the S&P500 dropped by 1.1 percent and the Nasdaq composite experienced a decline of 0.8 percent, as panicky investors abandon stocks as a viable investment option.
Highlighting the fact that emergency rescue measures seem to be falling short of the mark, the New York Federal Reserve revealed it will be lending a further $37.8 billion to American International Group (AIG). This is over and above the $85 billion advanced to the embattled insurer last month. As collateral for the loan, AIG is giving investment-grade, fixed-income securities to the New York Fed. These securities had previously been lent out to other financial institutions for a fee, but have been returned to AIG by those institutions wanting their money back. Quelling fears that the New York Fed is throwing good money after bad, experts believe that this additional loan will in no way compromise AIG’s commitment to repay the loan, which is to be done through the sale of various business interests.
September sales reports released by the nation’s chain stores indicate that U.S. consumers continue to feel the pinch, with more shopping around for discount prices on essential goods. Department stores and luxury retailers once again fell short of sales targets, while the pending home sales index rose as a result of companies buying repossessed homes far below their actual worth. With each new trading day presenting new challenges, there is no doubt that the turmoil in global financial markets is pervasive and is having a negative impact on everyone, from high flying executives to the man in the street.
