Central banks target credit crunch

Zeb Bham of Corporate FX on a federal interest rate cut and central banks' decision to help end credit woes

A: What do you make of this decision by the, by the central banks to, to club together to ensure that, the credit market doesn’t freeze up ?

B: I think Wednesday’s report that they were working together to auction off the, er… extra funds, er… over a 3-month period was sort of er…seen as a bit of er… a bit of positive for the markets and we saw most of the stock markets rally. But since then, the markets had digested that information and realized that this injection isn’t really going to er…alleviate the problems that we’ve seen in the credit crunch.

A: It was like the interests rate cut, wasn’t it? Really, the day before, where from the Fed, it was an interests rate cut which everyone wanted, everyone said we were gonna get, but it didn’t go quite far enough. It was the same with…with what the central banks did, we are talking about a lot of money in you and me terms, something like 49 billion dollars, but it’s in banking terms, it’s a relatively small amount, isn’t it?

B: Yeah, it indeed. It is a relatively small amount, and because it’s for such a short period of time. That’s the reason why the markets have taken this negative impact. I mean in Asia, we’ve seen the… the stock markets over there, react pretty badly, and the Asian Central Bankers haven’t really followed suit with what the Europeans and the Americans are doing, but the fears are still there that if the credit crunch continues, they could see their exports being crippled.

A: And what do you make of the… the interests rate cut by the Fed earlier in the week, a quarter of a percentage point, er.. it was what everyone wanted, as I said, but the reaction was more sort of “Come on guys, what planet are you living on there in the…in the Fed, you know, living in the same world as the rest of us?”

B: Exactly, I think it was mu(ch), came out much in lie, er… however, the rhetoric after meeting suggested that they are sort of …paving way for further rate cuts despite the inflation being pretty high, we saw both RPI and PPI coming out stronger than expected, em… and also we got CPI this afternoon, if we see this hotter than expected, it’s already expected to come out at 4.1%, even if you strip out food and oil from there, it's still expected to come out at 2.3 which is above the Fed's two percent target.

A: It’s interesting to hear you talk about inflation, and the Fed obviously sounded a lot of caution about inflation, and yet we had a survey out earlier this week which said that most of the American public thinks that the economy is already in recession.

B: Exactly, em… I think the, the word rather than recession is stagflation. We have, we are having problems with inflation at the moment, and the Fed with the difficult position of trying to control that, while it's at the same time, trying to prevent the er… American economy going into recession, and that’s where we see the rate cuts coming into play, the question now is whether the rate cuts are going to fuel inflation, or whether they are going to control er…growth as the U.S. is expecting.
A: And what’s your gut feeling about the CPI today with Bridge Rick and ...?

B: I think CPI’s gonna come out slightly hotter than expected, em… mostly due to higher fuel and energy cost, and the RPI and PPI gave us that direction as well. If we see it come out hotter, I think the Fed are gonna have to make another difficult rate decision about whether they are going to raise rates in January, and the …interesting to know the interests rate futures market is still predicting, 100% chance that the Fed are going to raise rate in January.

Notes:

PPI:roducer Price Index 生產(chǎn)價格指數(shù)

RPI:Retail Price Index 零售價格指數(shù)

CPI:Comsumer Price Index 消費(fèi)者價格指數(shù)