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The US Federal Reserve's rate cut fired up equity markets yesterday and drove the New Zealand dollar to a five-week high above US58c, but economists warn the dramatic move is symptomatic of a worsening global economic outlook which will affect the local economy.
Markets had expected the Fed to cut rates from their already historically low level of 1 per cent, but instead of stopping at 0.5 per cent, as most forecasters had predicted, it said it would target a federal funds rate in a range of zero to 0.25 per cent.
And in a comment that cheered equity markets, the Fed's open market committee (FOMC) added that it expected to keep rates "exceptionally low" for some time.
There was also an expansive description of the other measures that the Fed has already taken and can take in the future to affect real-world interest rates, including spending and lending new money in the financial markets.
This process, known as quantitative easing, was foreshadowed in a speech by Ben Bernanke, the Fed chairman, earlier this month.
Sharemarkets across the Asia Pacific region followed Wall St's lead yesterday, albeit with more modest gains.
Australia's ASX-200 rose almost 3 per cent in early trade but gave up those gains largely on news that Commonwealth Bank of Australia's A$2 billion ($2.4 billion) capital raising had struck problems.
Japan's Nikkei index was up 1.1 per cent but gave up gains to close slightly down as the yen rose, denting export shares.
In New Zealand, the NZX-50 finished the day just 0.03 per cent higher.
The New Zealand dollar, on the other hand, shot higher against a greenback which weakened sharply on the Fed's move. Opening around US56.40c, by 5pm it was near session highs at US58.05c.
Senior BNZ economist Craig Ebert said while it appeared equity markets had taken the Fed's move as a positive signal, "you have to again step back and think why they're doing this and it's because of some extreme distress".
"If anything, the economic data we've seen over the last few weeks has really taken centre stage, and that's saying something given the ongoing problems in the credit markets and all the damage that's been done there.
"The Madoff thing is only the latest instalment of this," said Ebert referring to the alleged US$50 billion fraud committed by former Nasdaq chairman Bernard Madoff.
The degree of slowdown even in the emerging economies of China, India and Russia had been "jaw-dropping".
"It's not a matter of how much things are slowing, it's how much they're going backwards, at least in the industrial economies," he said.
"We're looking at a global slowdown as bad we've seen probably since World War II and that has to affect New Zealand. I don't think an extra 25 basis points of cuts from the Fed really changes that outlook."
Deutsche Bank chief economist Darren Gibbs took the Fed's move as an ominous portent.
"You don't go down this route unless you're pretty worried about how the economy is looking."
ABSOLUTE ZERO
* US Federal Reserve will allow its official cash rate to drop as low as zero.
* It was expected to drop the rate from 1 per cent - but surprised markets by saying it will target a level below 0.25 per cent.
* It is the lowest level in the Fed's 95-year history.
* The federal cash rate is the overnight interest rate charged by the biggest banks to their peers, the first step in a chain of lending that eventually affects borrowing costs across the markets.
