<<NEW YORK, Sept 29 (Reuters) - The Federal Reserve's decision to trim U.S. interest rates for the first time in more than 2-1/2 years should
help investors reassess risks, but won't cure all the woes of the financial world, analysts said on Tuesday.
''It is not the arithmetic of 25- or 50-basis points that is going to make the difference,'' said CS First Boston chief U.S. economist Neal Soss, commenting on the Fed's decision to cut the federal funds rate by 25 basis points to 5.25 percent in its first credit easing since January 1996.
In a brief statement, the Fed said the easing move was ''to cushion the effects on prospective economic growth in the United States of increasing weakness in foreign economies and of less accommodative financial conditions domestically,'' while ''keeping inflation low and sustaining economic growth.''
WHAT THE DOCTOR PRESCRIBED
Soss, a personal assistant to then-Fed chairman Paul Volcker in the early 1980s said the small rate was ''about the sense of leadership, the sense of diagnosis and medication.''
Volcker had told Reuters in a recent interview a small Fed move would be ''mostly psychological.''
''A move by the Federal Reserve at this juncture is an indication the top doctor in the hospital visited the patient, reached a diagnosis and has begun to apply the medicine,''
added Soss who expected the rate cut to kick off an easing cycle.
The Fed last lowered the funds rate in three episodes totaling 75 basis points between July 1995 and January 1996 out of concern for the pace of the expansion.
''The Fed needs to keep on giving the medication. This will begin the process of restoring spreads to levels that reflect the analysis of credit risks rather than forced liquidation,''
Soss said.
Warning: part of the article may be missing at this point.
But Soss also stressed ''the Fed's goal is not and should not be to bring credit spreads back to levels that were irrationally exuberant before, but to prevent markets from being
irrationally depressed.''
Spreads in a broad array of debt markets experienced wide swings over the past two years, from excessively tight amid the market ''exuberance'' that Fed Chairman Alan
Greenspan cautioned against to excessively wide amid safe-haven capital flows that drove the benchmark 30-year bond yield to record lows.
The spreads' latest departure from historic patterns caused players in many markets to suffer severe losses as exemplified by the recent woes of Long-Term Capital Management
(LTCM).
Experts in various debt markets agreed easier U.S. credit would help, but would not cure all their woes.
HIGH-YIELD U.S. BONDS
Martin Fridson, director of global high-yield strategy at Merrill Lynch said ''We were hoping for more, but even if they had cut by 50 basis points, this would not have solved the world's problems.''
''The reason spreads widened were not so much credit-related than due to nervousness in financial markets,'' he added. ''The Fed dropping rates by 1/4 point is more positive than negative but does not do as much as worldwide coordinated efforts.'' >> |
