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‘Fed must act to avoid recession’

Concerns have been raised that the US economy could fall into recession unless the Federal Reserve acts decisively on interest rates.

Komal Sri-Kumar, chief global strategist at US investment firm Trust Company of the West, says the Fed must not use moral hazard as an excuse to maintain interest rates.

He says: “Moral hazard refers to the incentive for banks to make risky loans or for individuals or institutions to make reckless investments. Returns could be attractive on the upside but the entities would not have to bear the full cost if things turn sour, creating the hazard.

“Former Fed chairman Alan Greenspan is supposed to have contributed to such situations in 1987, 1995, 1998 and 2001 when monetary policy was eased in response to crises.”

Sri-Kumar disagrees with the argument that a cut in the Federal funds rate would ease the plight of investors, hedge funds and buyout firms which bet the wrong way, encouraging similar investment patterns in the future. He says: “We find the argument to be specious. We doubt a reduction in the Federal funds rate today would result in a surge of imprudent investments and loans.”

He says the longer the Fed waits, the more substantial will be the reduction in the Federal funds rate needed to avoid recession or restore financial stability.

Sri-Kumar says: “If the Fed does not act before the next scheduled meeting of the Federal open markets committee on September 18, it could require a full percentage point cut.”


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The RDR shows the FSA’s flawed thinking on raising industry standards

Arc building on wealth with Throgmorton buy

Arc Fund Management has bought IFA Throgmorton Asset Management in a deal potentially worth £1.6m.The acquisition is Arc’s first step into a wealth management division.Throgmorton has around £150m of fund assets under advice and earned £210,000 on turnover of £1.57m for 2006. It was founded in 2002 to offer advice to small businesses and high-net-worth […]

Royal Liver set for multi-manager

Royal Liver will introduce a range of multi-manager investment funds in early 2008 as part of its modernisation strategy.

Public lose faith in pensions

Pension investment is collapsing among the public who are looking to other forms of savings to provide most of their retirement funding, according to YouGov research.The survey, commissioned by software firm Mastek, found that 63 per cent of respondents are not saving for their retirement within a private pension.However, 89 per cent of the 2,000 […]

When is £1m not £1m?

Neil Jones is technical support manager with Canada Life’s ican Technical Services Team. Canada Life offers a range of wealth management solutions, including retirement income planning, estate planning and investment solutions from a choice of jurisdictions, including the UK, Isle of Man and Republic of Ireland. The residential nil-rate band (RNRB) was first announced in […]


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