Too cautious Fed rate cut mitigated by concerted central bank action

Marsico Capital Management has welcomed the latest reduction in the US Federal Reserve (Fed) Funds rate but views the cut of one quarter of a percentage point to be too cautious, according to Cory Gilchrist, manager of the Gartmore US Opportunities Fund and the Gartmore SICAVUS Opportunities Fund. “Our view for some time has been that the US economy is slowing, and that inflation pressures are subsiding. Fed policy generally has been behind the curve with that view,” he commented.

In the immediate aftermath of the rate cut, the Fed’s perceived lack of decisiveness triggered sharp share sell-offs globally. However, US equity markets were resurgent on the morning of 12th December (local time) in the wake of news that the Fed had joined with four other major central banks to add cash to global money markets and to help stimulate inter-bank lending activity.

The Fed did seem to signal that future interest-rate cuts could take place but – again – cited inflation as an ongoing concern. However, Marsico believes the Fed needed to act more decisively, particularly in the form of lowering the discount rate by a greater amount.

The central bank would appear to have taken insufficient account of the mounting evidence that the sub-prime and mortgage-finance problems have started to spread to the real economy – an impact that has been most acutely felt in the housing market and, more recently, on employment.