Further Fed funds rate cut on cards as crisis deepens

Two and a quarter percentage points off American interest rates in barely four months and a $150bn (£76.6bn, E102.9bn) fiscal package being rushed through Congress – and still confidence in financial markets continues to slide.

Two and a quarter percentage points off American interest rates in barely four months and a $150bn (£76.6bn, E102.9bn) fiscal package being rushed through Congress – and still confidence in financial markets continues to slide.

Now come calls on the Federal Reserve for another emergency cut of one full percentage point in the Fed funds rate on or before its scheduled meeting on 18 March.

That begs disturbing questions, not least of which is this: what is it that a further percentage-point cut in rates will achieve now, that cuts of 2.25 percentage points from 5.25% to 3%, have failed to do?

Still the problems pile up. On Tuesday plans by Standard Chartered to provide more than $7bn in backing to Whistlejacket, one of its structured investment vehicles, fell through as deeper losses in the underlying assets forced it to appoint a receiver for the product. Whistlejacket had breached its capital-note net asset value of 50% due to a fall in the value of its assets, triggering the appointment of a receiver.

Willem Sels, a credit strategist at Dresdner Kleinwort, said the news could add pressure to a credit market wracked by fears over the unwinding of structured products. “The concern for the market overall,” he warned, “is that we’re going to have some more forced selling again.”

A widening array of financial-market problems threatens to trigger a new phase in the global credit crunch, extending it beyond the risky mortgages that have cost banks and investors more than $100bn in losses and helped push the American economy toward recession. In recent days, low-rated corporate loans – typically used to fuel the buyout boom – have plummeted in value. As a result, banks are expected to try to unload some of those loans this week at fire-sale prices. Nervous buyers have also retreated in recent days from the market for securities backed by municipal bonds and commercial property.

By the deepest of ironies, the Fed’s dramatic rush of interest rate cuts, designed to stave off a US recession and stabilise confidence, may be encouraging investors to flee from investments that do poorly when interest rates fall.

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