Fed The Saviour of the Day?

What a day, global markets came alive after US Federal Reserve decided to cut interest rates by 50 basis point (or half a percentage). This is an unexpected positive news from the Fed, given that the general consensus appeared to be a maximum rate cut of 25 basis point or stayed unchanged. To top up the icing on the cake, Fed also cut bank loan discount rates by another half a percentage! The Fed's decision, aimed at shielding the economy from a credit crunch as well as a slump in the housing sector, came about a month after it cut its discount rate in an emergency move to encourage banks to borrow directly from the central bank. US and global markets indeed reacted positively, with Dow rose 2.5%, Asia stockmarkets also rose between 1 - 4% with India Stock Exchange being the best performer with a 4.17% increase! (Interesting to note that China's Shanghai Index had not reacted positively to the news and had in fact fallen by half a percentage point. Perhaps a strong signal that China stocks are losing its steam after such a fanatic run).

As global investors welcome the latest development, there were mixed reactions from researchers to analysts. Some augur the move as a good one, while others felt that US Federal Reserve had overreacted. Perhaps the US Central Bank finally reckons that the housing subprime woes and credit crunch are causing a bigger damage to the overall economy, leading to a worse than expected job data, thus such drastic measures has to be taken. However, there is still a genuine threat on inflation, given the fact that crude oil price has again hit record level and is still threatening to rise further. Perhaps, it could also be a case of politics versus pragmatism....Nevertheless, the measure is indeed a strong dose of confidence across the business and investment community. However, it does not mean that we are now out of the woods (of the subprime and credit crunch). A lot will depend on how companies and financial institutions perform over the next few months.