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The Fed to the rescue

THE December meeting of the US Federal Reserve was significant from a number of points of view.

It was the first time in a little while that we saw the Fed actually move to a bias towards easing rates rather than raising them.

For a significant period of time the talk around the “Street” had been Alan Greenspan’s desire to make a “Pre-emptive” strike against the inflation bogey and the "Irrational exuberance" of equity markets in America.

Contrast that with the statement of the Fed on December 19, 2000 when they said: “The drag on demand and profits from rising energy costs, as well as eroding consumer confid-ence, reports of substantial shortfalls in sales and earnings, and stress in some segments of the financial markets suggest that economic growth may slow further….the committee con-sequently believes that the risks are weighted mainly towards conditions that may generate economic weakness in the foreseeable future.”

Clearly this was the first signal that the Fed was moving towards actually cutting rates.

In January they did impose a 50 basis point fall, which took the Federal funds rate down to 6 per cent.

Even in the statement accompanying the rate cut, the Fed again emphasised the risk of on-going economic weakness as its main concern.

At this stage, there are economists suggesting that at the next meeting of the Fed at the end of January there could be a 25 basis point rate cut.

The change in the Fed’s stance on monetary policy has reinforced the views held by a number of fund managers such as Merrill Lynch that a turn around in global liquidity conditions is certainly happening now.

Their view is this is significant and they expect that at some point in the next few months, improving liquidity will start to out-weigh earnings concerns as the key driver of equity market performance.

In simple terms, the average layperson can anticipate that the world economy is slowing significantly and that will have its own resultant impact on Australia’s domestic economy.

Whether that translates into a recession forecast is an altogether different matter.

At this stage there are few commentators suggesting that a recession is likely globally or domestically.

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