COMMENT Act one of the drama gripping the US economy featured subprime mortgages. Act two – which was all about house prices, asset-backed commercial paper and the three-month Libor rate – came to a spectacular end last week when the Federal Reserve cut interest rates by an aggressive 50 basis points. Act three will be about the dollar. If low interest rates cause foreign investors to lose confidence in the US currency then the chance of recession in the world’s largest economy will rise.
Ben Bernanke, Fed chairman, and his board of governors will look at the market reaction to their rate cut with trepidation. Shares bounced. Short-term interest rates fell – although the squeeze on bank liquidity has not yet been resolved. That is all as expected.
