Threadneedle claims the move follows rumours of retail investors seeking to withdraw their savings from Countrywide overnight and acknowledges the recent serious deterioration in liquidity conditions in the interbanking system.
Threadneedle head of government bonds Quentin Fitzsimmons says: “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’.”
Fitzsimmons says 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.
He says: “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.”
Jupiter Asset Management chief executive Edward Bonham Carter agrees, saying the Federal Reserve has acknowledged the risks to economic growth that recent market dislocations have posed.
He says: “It is therefore now more likely that we will get an interest rate cut at the Fed’s next monetary policy committee meeting on 18th September.
“While the European Central Bank has injected substantial liquidity into markets, it may take longer before interest rates in the UK and Eurozone start to come down as central banks may require more evidence of an economic slowdown before acting.”
Bonham Carter says the Fed’s move may go some way to calming nervous markets, but investors should still expect markets to remain volatile over the next few months as events unfold.
He adds: “The current setback, though unpleasant, does not alter our view that shares continue to be an attractive asset for investors over the medium term. The US economy may be slowing down, but there is no reason to expect it will go into recession.
“Global economic growth is still strong, equities are trading at modest valuations and companies are in rude health. We would reiterate our view that this setback is a potential buying opportunity for investors prepared to take a medium-term view.”