The World Economy

Extract

The past few weeks have seen turmoil and turbulence in global financial markets, with 21 January seeing the sharpest one-day share price falls in many Asian and European markets since 2001, ostensibly in response to widespread fears of an imminent recession in the US. A careful examination of the available real indicators suggests that much of the recent panic in financial markets is not based on fundamentals, although the aggressive response of the Federal Reserve, with the biggest rate move since 1994 at an unscheduled meeting, gave the impression that it was privy to information that had not yet appeared in hard data, such as the imminent collapse of a major US bank. However it is also possible that the Federal Reserve acted precipitately to technical fall out from losses at Société Générale in France, which seems to have sparked much of the panic trading. The Banque de France informed the Federal Reserve of the matter in advance of their meeting scheduled for the following week. It is possible that if the Federal Reserve had waited for all the information they needed they might not have acted, and indeed they may have damaged their credibility by their precipitate action.