SWIP comments on Federal Reserve rate cut

Comment from Sebastian Mackay, Senior Economist, Scottish Widows Investment Partnership (SWIP) on the global economy following the announcement by the Federal Reserve to cut the interest rate at which it lends money to banks: "We are seeing financial market turbulence continuing, with further falls in equities and risk aversion spreading to emerging market assets and currencies. Central banks continue to provide liquidity and the Federal Reserve cut the discount rate by 0.5% to 5.75% which has provided a clear signal that the Fed is there to help out.

"Reducing the penalty for borrowing at the discount window reduces the stigma attached and allows banks to use this facility credibly if conditions continue to deteriorate. Having used downside risks to growth to justify the reduction in the discount rate, the Fed can now rationalise a cut in the Fed Funds rate, probably at the next meeting. Pressure is mounting for the ECB and MPC to refrain from hiking rates further."