The Federal Reserve's 50-basis points or half-percentage cut in the key benchmark rate to 4.75% had stock markets all over the world rallying, led by Wall Street. In our case, the "differential" between Philippine vis-a-vis US assets will consequently rise, paving the way for funds to flow into the market, propping up the local currency. The peso opened firmly in the PhP45 territory yesterday.
As I see it, the Fed is clearly worried over the likelihood that the US will slide into recession. A big cut in the benchmark rate sends a strong signal to the banking system to continue supporting growth initiatives. Scaling back lending activities for fear of a similar sub-prime backlash will unecessarily hold back growth in other sectors not affected by the credit and housing crunch. And the bigger-than-expected rate cut which translates into a significant reduction in borrowing costs functions as a blanket guarantee to address bank fears of increased default risks extending to other sectors.
As I see it, the Fed is clearly worried over the likelihood that the US will slide into recession. A big cut in the benchmark rate sends a strong signal to the banking system to continue supporting growth initiatives. Scaling back lending activities for fear of a similar sub-prime backlash will unecessarily hold back growth in other sectors not affected by the credit and housing crunch. And the bigger-than-expected rate cut which translates into a significant reduction in borrowing costs functions as a blanket guarantee to address bank fears of increased default risks extending to other sectors.
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