Whilst interest rates in Australia are spiraling upwards as a result of the Sub Prime crisis, the same event seems to be having the opposite effect at home in the US. The credit crunch, along with various other factors including a protracted housing slump, are threatening the economy with recession, allowing for falling interest rates.
Federal Reserve chairman Ben Bernanke said overnight "In light of recent changes in the outlook for and the risks to growth, additional policy easing may be necessary. We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks.''
Analysts interpreted Mr Bernanke's remarks as suggesting the central bank will slash interest rates by more than expected at a two-day meeting on interest rates scheduled for January 29-30. The Fed has trimmed borrowing costs by a full percentage point since September as concerns about the mortgage and credit markets have spiked. "Bernanke's comments indicate the Fed had done nothing to dissuade the market from an expected 50-basis-point rate cut later this month,'' said Marc Chandler, an analyst at Brown Brothers Harriman.
Wall Street appeared to welcome Mr Bernanke's stance, as the Dow Jones Industrial Average rose to around 12,818.14 points in mid-afternoon trading. The index has plummeted from a record high of 14,164.53 points in early October.
Economists at Goldman Sachs warned in a briefing note Wednesday that the world's biggest economy appears to be "falling into a recession.'' Investment bank Merrill Lynch has gone a step further, quoting a 100% possibility of recession in the US.
The central bank chief said the housing downturn had shaken the financial markets which he described as "fragile'' and made big banks more cautious about lending. Such strains would continue to pose economic risks, he said.
He said the housing market's woes and "the subprime crisis,'' home loans granted to Americans with poor credit, had heavily dented the earnings of some major banks, but stressed the "banking system remains sound".
The Fed chief also said the latest survey on the job market had revealed slower employment growth and that this could affect consumer spending, especially if companies cut back on hiring.
Some economists believe the central bank will have to cut rates as low as 2.50 per cent by the end of 2008 to keep the economic ticking along. While the US seems to be on a completely different cycle to Australia, many local analysts appear to be taking a pessimistic view of the effects on our local economy.