US Federal Reserve interest rate cut

As the US Federal Reserve slashes interest rates by 0.75%, Richard Woolnough, manager of the M&G Optimal Income Fund, comments on the outlook for bond markets: “The US Federal Reserve has acted very aggressively in cutting interest rates by 0.75%, a week before the scheduled meeting. This is the first time since 1984 that it has cut rates by 0.75% in one go. The move is undoubtedly intended to boost the ailing economy, and offer reassurance to financial markets, but it doesn't change the fact that the US economy is in serious trouble. Interest rate cuts take 18 months to work through to the economy, which means that as far as the US economy of January 2008 is concerned, rates are still at 5.25%."

“The credit crunch is only now starting to hit the broader economy. Recent data releases from the US have been horrific, as shown by the staggeringly weak US retail sales and business outlook survey numbers out recently. The wobble in high yield bonds and equities show that people’s expectations are finally starting to change, but I think financial markets are still grossly underestimating what this credit crunch means for the broader economy.

“The Fed's decision to slash rates doesn't change my view that a US recession is a probability this year, nor will it prevent corporate profits from falling across the board. I think central banks worldwide will continue to react to the severe slowdown by continuing to cut interest rates aggressively, which is good news for government bonds and investment grade corporate bonds.”