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FOMC Emergency Rate Cut

The FOMC caught markets off guard on Tuesday with an unexpected inter-meeting 75-basis point rate cut, bringing the Fed Funds rate to 3.5%. In the accompanying statement, the Fed cited “weakening of the economic outlook and increasing downside risks to growth” for the aggressive move. The greenback quickly sold off against the euro and sterling after the announcement and remains weak heading into the Wednesday session.

The Fed’s easing today marks the largest rate cut of this stature since 1982 and first inter-meeting move since the September 11th attacks. The Asian equity bourses took solace in the FOMC’s aggressive action to stave off a US economic recession, with Tokyo’s Nikkei index rallying 3.35% and Hong Kong’s Hang Seng up 7.18% by midday. With the scheduled policy deliberating meeting just a week away, I expect another 50-basis point rate cut when the Fed announces its decision next Wednesday.