Rate cuts not enough to avert US recession

The Federal Reserve’s recent slashing of interest rates will likely not be enough to avert recession, according to State Street Global Markets weekly research report.

The research report said that while the decision to cut rates now looks appropriate, economic conditions have become gloomier since the cuts, with US growth slowing to a stall rate in the fourth quarter.

“The Fed has at least shown a determination to get ahead of events” with rate cuts, it said, but it’s “a fight the Fed was ill-equipped to win”, as the fall-out from the credit crisis continues to spread.

The “battle for investor sentiment is being equally hard fought, in markets that are volatile and continue to gyrate at the mercy of events”, the report added.

“While the Fed is right to focus on the credit markets because the ability to borrow money and refinance existing debt has a direct impact on economic activity,” it doubted that the latest cut could “finally turn investor sentiment”.

“At some point in every interest rate cycle fund managers shift their gaze from the present to the future. The stock market is a leading indicator, but flows suggest it is not yet ready to lead.”