Moves by US Fed expected

In line with market expectations, the US Federal Reserve (Fed) lowered the benchmark Fed funds rate by a quarter point to 2% with an accompanying statement that it is ready to pause after seven cuts since September.
Singular Asset Management Sdn Bhd chief investment officer Teoh Kok Lin said in a way the cut was good for the domestic market, easing investors' concerns especially among those worried about the subprime issues in the US market.

“The Fed has signalled that this is the last cut, at least for the short term. This suggests that the Fed is quite confident of the impact of its other stimulus action,” he told StarBiz.
Also important was the US' first quarter gross domestic product growth of 0.6%, out on Tuesday, that was significant because it was not negative, as some people had feared, Teoh said.
“This shows that while the US economy is not doing so well, it is nowhere near a contraction. Together with the fact that Asia also has its own internal growth engine, it is not possible for Asia to go into recession,” he added.
Aseambankers Equity Research head Vincent Khoo said the rate cut as well as accompanying statement had already been widely expected by the market.
He pointed to the US dollar that had been strengthening in advance of the announcement anticipating comment on the pause in rate cuts.
“The markets are already pricing for future expectations,” he said.
The most significant part of the Fed announcement was the comment that the Fed would pause, but was looking to the fiscal stimulus tax rebate that Americans would be receiving in early May to early July as a more important catalyst, Khoo said.
“Beyond that, I don't see any catalyst for the market. We could be at the tail end of a relief rally in a bear market,” he added.
Meanwhile, from a economic viewpoint, CIMB Investment Bank Bhd head of economic research Lee Heng Guie told StarBiz the rate cut was in line with market expectations but smaller than recent ones.
While the Fed had left out certain words in its announcement, it had kept the statement much the same.
Lee did not think there was a firm commitment to pause on rate cuts but rather the Fed could be adopting a “data-dependent stance.”
“It (the Fed) would likely be monitoring the economy and take action if the situation were to deteriorate. Most likely in the second half (of the year) and with smaller increments,” he said.
Meanwhile, Bloomberg reported the Fed's Federal Open Market Committee after meeting overnight yesterday in Washington as saying in a statement: “The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time.''
Fed chairman Ben S. Bernanke and his colleagues dropped a reference to “downside risks'' to the economy, while acknowledging the damage that the housing slump had wrought on the six-year expansion, said Bloomberg's report,
The central bank also warned that “some indicators of inflation expectations have risen in recent months,” it added.
Meanwhile, Dallas Fed president Richard Fisher and Philadelphia Fed president Charles Plosser dissented with the decision, preferring no change. They also objected to last month's reduction.
Reuters reported Plosser writing in the Philadelphia Fed's annual report released on Wednesday that the costs to a central bank of losing inflation fighting credibility were high.
“Such a loss of credibility would pose grave problems for monetary policy makers because it puts the achievement of their dual mandate (of maximum employment and price stability) at risk and must be avoided,” Plosser was quoted as saying.