Fed’s hike of emergency loan rate hits world markets, spurs concerns of faster tightening

By Carlo Piovano, AP
Friday, February 19, 2010

World stocks hit by Fed’s emergency loan rate hike

LONDON — World markets mostly fell Friday after the U.S. Federal Reserve unexpectedly raised interest rates for emergency bank loans, triggering fears that regular borrowing costs could also move higher soon, slowing the recovery in the world’s largest economy.

The losses, however, were limited later in the day by benign inflation data from the U.S.

After sharp drops in Asia, Britain’s FTSE 100 was flat at 5,327.93 while France’s CAC-40 fell 0.3 percent to 3,737.85. Germany’s DAX stock index edged up 0.1 percent to 5,687.13.

Wall Street fell on the open, with the Dow Jones industrial average losing 0.3 percent at 10,367.06 and the Standard & Poor’s 500 shedding 0.3 percent to 1,103.23.

The Fed said Thursday it has bumped up the “discount” lending rate by a quarter point to 0.75 percent, part of a pullback of the extraordinary aid it provided to fight the financial crisis. It said the step should not be seen as a signal that it will soon boost interest rates for consumers and businesses, but markets were unnerved.

The surprise Fed announcement left traders wondering whether the so-called “exit strategy” from a loose monetary policy could come faster than expected and stifle U.S. consumer demand.

“It begs the questions of why this was not done, or at least signaled at a regular Federal Open Market Committee meeting,” said Marc Ostwald, strategist at Monument Securities in London.

“It certainly is the case that the Fed wants to see how money markets function without so much of the liquidity life support that the Fed has been providing, and as such one can term this a form of ‘kite flying’,” said Ostwald.

Losses in Europe were limited by U.S. statistics showing a moderate inflation rate of 0.2 percent in January, less than economists’ forecasts for 0.3 percent.

The figure raised hopes that despite the hike in the deposit rate, the Fed may not be rushing to raise borrowing rates for consumers and businesses in the wider economy.

In the wake of the data and the Fed rate hike, the euro fell in European afternoon trading, to $1.3507 from $1.3529 late Thursday. After the Fed announcement, it hit a nine-month low below $1.3400. The dollar was roughly unchanged against the Japanese yen at 91.75 yen.

The euro has been under pressure in recent months over worries about the debt problems of Greece and other countries in Europe, such as Portugal and Spain. Although the EU said it was committed to helping Greece in case of a default, it did not provide any concrete plans for a bailout but limited itself to demand more spending cuts.

Economic data in Europe, meanwhile, failed to shore up investor sentiment. The purchasing managers’ survey of the eurozone, an economic indicator published by Markit research group, was stable in February, suggesting the recovery from recession has stagnated somewhat.

A rise in the manufacturing reading offset a drop in the services sector, providing “little hope that the much-needed domestic recovery is beginning to materialize,” said Ben May, European economist at Capital Economics in London.

In Asia, markets in China and Taiwan are closed this week for the Lunar New Year holiday.

Hong Kong’s Hang Seng stock index led decliners, diving 2.6 percent to 19,894.02 while Japan’s Nikkei 225 stock average dropped 2.1 percent to 10,123.58.

South Korea’s Kospi declined 1.7 percent, India fell 1 percent and Indonesia dropped 0.5 percent.

Singapore’s stock measure retreated 0.9 percent despite an increase of the government’s 2010 economic growth forecast to between 4.5 percent and 6.5 percent from 3 percent to 5 percent.

Oil prices edged above $79 a barrel after the inflation data eased fears in the wake of the Fed’s rate hike.

Benchmark crude for March delivery was up 7 cents at $79.13 in electronic trading on the New York Mercantile Exchange. The contract added $1.73 to settle at $79.06 on Thursday.

AP Writer Alex Kennedy in Singapore contributed to this report.

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