Markets posted steady gains in Asia following an interest rate cut by the U.S. Federal Reserve Bank. Earlier this week most Asian stock exchanges plummeted on fears that the U.S. credit crisis is far from over. As Naomi Martig reports from Hong Kong, investors are still fearful that the Federal Reserve may be running out of options to ward off a U.S. recession.
Japan's Nikkei Index and Hong Kong's Hang Seng both closed more than two percent higher Wednesday after the Federal Reserve cut a key interest rate by three-quarters of a percentage point. Most other Asian markets rose by similar amounts.
Although the cut was less than many investors had expected, it still sparked a rally on Wall Street. Stronger-than-expected earnings from two U.S. investment banks also encouraged investors to buy stocks.
The Fed's rate reduction follows emergency measures in recent days to ease the liquidity crisis in credit markets.
Michael Spencer is the chief Asia economist for Deutsche Bank in Hong Kong. He says concerns are still rampant that the Fed may not be able to do enough to avoid a U.S. recession.
"But I think it's important to understand that what the Fed is doing at the moment is much less around trying to shore up growth and more trying to take out the … risk for the U.S. economy that would come from a broader systemic crisis within the U.S. financial system," he said.
Spencer says he expects the Fed to further reduce interest rates by around 25 to 50 basis points. But he says that in addition to the U.S. credit crisis, the Federal Reserve governors are now concerned about other economic challenges.
"It does appear from the statement last night that the Fed is beginning to get a little more worried about inflation and that may lead them to cut rates a little bit less aggressively over the next few meetings than what we ere expecting," he said.
Low interest rates can worsen inflation because companies and consumers are willing to spend more and take on more debt when rates are low. To counter rising prices, central banks typically raise interest rates, which discourages spending and borrowing, and can help push a weak economy into recession.
The cut in U.S. interest rates helped lift the dollar. It was trading at 99.24 yen in Wednesday afternoon trading, well above a 13-year low earlier this week. Commodity prices also fell on Wednesday, with gold hitting a low of $980.80 an ounce, down from more than $1,030 on Monday, and oil fell one dollar to around $108 a barrel.
The banking system woes in the U.S. are largely the result of the sub-prime mortgage collapse. Sub-prime mortgages were made to homebuyers with poor credit records, and many of them now are struggling to pay their debts because interest rates rose and property prices fell.
Despite the steadier financial markets Wednesday, Asia's largest economy, Japan, faced a new challenge. The parliament rejected the ruling Liberal Democratic Party's latest nominee to replace the previous governor of the Bank of Japan, leaving the job vacant.
Prime Minister Yasuo Fukuda has been struggling to avoid a vacancy at the BOJ at a time when global markets are in turmoil. But many financial analysts think the stalemate is not likely to significantly affect global markets.