US rate cut too late to avoid recession says analysts

The US Federal Reserve's emergency rate cut today will deliver a jolt of stimulus to an ailing US economy but may be too little and too late to avert a painful recession, analysts say.
Economists say the surprise cut of three-fourths of a percentage point, the largest since the central bank began using the federal funds rate as a policy tool in the 1990s, may help kick-start flagging growth.
Yet some say the move will bring little immediate relief and other critics say Fed chairman Ben Bernanke may have buckled to market pressure, setting a bad precedent.
Keith Hembre, chief economist for First American Funds, said the rate cut in the funds rate to 3.5 per cent "is a welcome move" but not enough to avert a downturn.
"Our forecast is that we're likely to have a recession and the Fed needs to bring its real rate (after adjusting for inflation) to zero," Hembre said, suggesting a federal funds rate of around 2.5 per cent.
"Monetary policy is going to affect the economy with a substantial lag so this will not do anything to head off economic trouble in 2008 but it should set the stage for a pretty good environment in 2009," Hembre added.
The emergency action after a video conference yesterday and a week ahead of the Fed's scheduled meeting underscored the panic facing US policymakers and financial markets.
"The good news is the Fed is telling markets they are on the job where there is a risk that financial market instability will hit the global economy," said Avery Shenfeld of CIBC World Markets.
"The bad news is that sentiment turned so ugly the Fed couldn't wait until their meeting next week."
Joel Naroff at Naroff Economic Advisors said the latest actions suggest the Bernanke Fed is behind the curve.
"Unfortunately, Mr Bernanke seems to act strongly only when pushed to the wall," Naroff said.
"Indeed, this is the second crisis cut in five months. He failed to recognise the extent of the subprime problem at the August 7 Fed meeting. Soon afterward, he was forced to cut the discount rate because of deteriorating credit conditions."
Robert Eisenbeis, a former Atlanta Fed economist, said the rate cut "raises questions about whether the Fed has caved to market pressures".
"It is hard to conclude other than that this move was geared to address market psychology rather than a policy move dealing with emerging weaknesses in the real sector," Eisenbeis said.
Robert Brusca of FAO Economics said the Fed action may send the wrong signal to jittery markets.

"It is a very bad precedent for the Fed to cut rates to stabilise stock markets," Brusca said.
"Perhaps the worst precedent is that the Fed is doing this so early ahead of an election cycle making it seem like it is susceptible to political pressures. Along with that is the fact that the Fed has cut rates in this episode under pressure from collapsing markets. Markets seem to be able to bully the Fed too."
Bernard Baumohl, managing director of The Economic Outlook Group, said the Fed may not be able to stave off a downturn that spreads globally.
"What's pushing the global economy toward recession ... is the rapid deterioration of the international financial system," he said. "What began as a contained subprime mortgage problem in the US has blown up into a full-fledged global credit crunch. And there is no sign yet of when it will end."
Nouriel Roubini, a New York University economist who has been predicting recession for months, said the financial market collapse shows investors are waking up to the severe problems in the United States and globally.
"The US recession is unavoidable and has already started, and this recession will be ugly, deep and severe, much more severe than the mild eight-month recessions in 1990-91 and 2001," Roubini said.
Roubini said the market turmoil shows the fallacy of the theory of the global economy "decoupling" from that of the United States.
"The rest of the world will not decouple from the US," Roubini said, arguing that the shocks in the US "will lead to a sharp global growth slowdown: 2008 will be the year of recoupling rather than decoupling."
AFP