US fed cut provides “sense of relief for investors” says Threadneedle

Any normalisation in conditions should prompt investors to refocus on the fundamentals of solid earnings growth and attractive valuations.

Quentin Fitzsimmons, Head of Government Bonds at Threadneedle:

The Federal Reserve has cut the rate at which it lends money to banks (known as the primary discount rate) from 6.25% to 5.75%.

The move follows rumours of retail investors seeking to withdraw their savings from Countrywide, one of the US's largest savings institutions, overnight and acknowledges the recent serious deterioration in liquidity conditions in the interbanking system.

The Fed's actions are shrewdly targeted at normalising these conditions without crudely lowering the Fed Funds Target Rate, a move which could have left the bank open to accusations of deserting its role of guarding against excess inflation.

There was no mention of inflation in the accompanying statement but the Fed said that "downside risks to growth have increased appreciably" and that it was "prepared to act as needed to mitigate adverse effects on the economy" .

Meanwhile, the Fed has also relaxed the range of securities that may be lodged with it in return for cash to include commercial paper and mortgage backed securities.

All in all, the move provides a sense of relief for investors - equity markets have reacted positively. Any normalisation in conditions should prompt investors to refocus on the fundamentals of solid earnings growth and attractive valuations. However, nervousness will remain and there is no guarantee that this is the defining event that marks the end of the crisis. We are maintaining a long duration position in our bond portfolios in the expectation of further economic weakness in the US.