Fed Cuts Rate by 75bp In Surprise Move

The Fed, in a surprise move Tuesday morning, cut the Fed funds rate to 3.5% from 4.25% - a whopping 75 bp cut. This move today is somewhat unexpected as the FOMC is due to meet only next week. Not only that, it’s the largest single rate cut since the Fed began using the rate as the main tool of monetary policy around 1990. Just last week I mentioned the possibility of an inter-meeting cut, but that had somehow faded away.

Today’s inter-meeting rate cut is the first since September 17, 2001, six days after the 9/11 terrorist attacks. That was the third emergency cut in 2001 when the US was in recession.

Before this announcement , EUR/USD successfully broke below 1.4400 to an expected target around 1.4360, from which it bounced strongly up and is now hovering above 1.4600. Post rate cut, USD fell against other currencies and will be pressured on the downside once more.

Euro is now looking to strengthen again - sentiment (more of strong USD weakness) and technicals are favouring that. Beyond 1.4650, EUR/USD may next target 1.4700-10.

This is what the Fed said: “Appreciable downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.” The FOMC vote was 8-1, with St. Louis Fed’s Poole preferring to wait until the regularly scheduled meeting. Fed’ Mishkin was absent and not voting.

Meanwhile, Canada cut its main rate by 25bp to 4% and said more reductions are likely needed in the “near term” as the worsening US economy drags on Canadian exports and inflation and economic growth slows.

Wednesday:

Australia CPI 0030 GMT

UK GDP 0930 GMT

US MBA mortgage applications 1200 GMT

New Zealand rate decision 2000 GMT (rate expected to stay at 8.25%)

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