Federal Reserve

Calm prevails as Fed meeting's outcome awaited

PUBLISHED : Monday, 12 August, 2002, 12:00am
UPDATED : Monday, 12 August, 2002, 12:00am

Trading gets under way on regional stock markets today, with investors alert to this week's meeting of the Federal Reserve's policy-setting committee in Washington.

That meeting will come after weak data last month and a sharp sell-off in stock markets worldwide signalled a challenging second half for the US economy.

The one-day gathering of the Federal Reserve Open Market Committee (FOMC) tomorrow is shaping up to be one of the more contentious in recent months though many analysts have backed away from forecasting that the target federal funds rate would be eased beyond its 40-year low of 1.75 per cent. While the Dow Jones Industrial average surged 432.32 points or 5.2 per cent to 8,745.45 last week, partially on hopes of another reduction in borrowing costs, analysts said investors globally have calmed somewhat since the plunge in stock markets last month.

'Markets have been a lot more relaxed in the last few weeks, despite the bad data,' said Jonathan Asante, chief economist with Framlington Investment Management, who put the chances of an easing at 20 per cent - in line with what bond markets were pricing in.

Analysts said the Hang Seng Index, which rose 22.34 points or 0.22 per cent last week to 10,014.06, was likely to be taking its cues from interim results announcements from bellwether firms such as China Mobile, but said the Fed statement accompanying its decision would be watched for future movements.

Even if the Fed cuts this week, there is no certainty Hong Kong will follow. Although local banks typically mirror US interest rate movements, the last few cuts have not been matched, with rates reduced by only half the proscribed amounts.

Local bankers have declared their reluctance to reduce rates any further with savings deposits already attracting only 0.125 per cent and time deposits of HK$100,000 or more attracting rates of only 1 per cent.

Until early summer, the consensus view was that the next move by the FOMC would be for a rise in short-term rates before year-end as the economy seemed to spring back from last year's recession and September 11 terrorist attacks.

This school of thought was shattered by more revelations of accounting mis-reporting on Wall Street and a raft of weak data last month that raised the possibility of the US sliding back into recession. This triggered a global stock market sell-off, led by the Dow Jones Industrial Average, which plunged 17.88 per cent in just over two weeks and helped fuel calls for more rate cuts.

Goldman Sachs' US economic team on Friday said a rate cut this week was unlikely but expected a shift in the Fed's bias in favour of an easing.

'Not only has the economic news indicated a clear shift in the balance of the risks with the activity data much weaker and the inflation data very tame, but also market sentiment has shifted sharply,' the report said.

Although the futures market is pricing in an aggressive move by the Fed before the end of this year, on Friday Morgan Stanley became the only large Wall Street house to forecast an easing coming out of this week's meeting, saying it expected the target rate to be lowered to 1.25 per cent.

The case for a rate cut was given added weight on Friday after the Labour Department announced worker productivity grew 1.1 per cent in the second quarter against 8.6 per cent in the first, more evidence that the US economic upturn in the first quarter has lost direction.