Jeremy Warner's Outlook: Fed cut disappoints Wall Street hopes

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The Independent Online

Wall Street duly got the cut in interest rates it was looking for last night, but not the full 50 basis points that many thought necessary to underpin fast evaporating consumer and business confidence. Only one member of the Federal Reserve's Open Markets Committee was prepared to deliver on that front.

What's more, Ben Bernanke, the chairman, seemed again to signal that the quarter-point cut enacted was all the markets were likely to get for now. In its statement, the committee said that inflationary risks remain, causing Wall Street, which under Mr Bernanke's predecessor, Alan Greenspan, always seemed to get what it wanted, to wobble badly. Even in a crisis, Mr Bernanke is proving altogether less compliant.

Yet you can understand his point. With rising inflationary pressures, central bankers have extremely limited room for manoeuvre, despite the crisis in financial markets, fast slowing growth and, in America, the ongoing housing correction. Data published yesterday that showed inflation in China rising to its highest level in years seemed only to underline the point.

Western markets may no longer be able to rely on cheap goods from Asia to keep the lid on inflation. The low inflation growth of the past 15 years may be drawing to a close. Worryingly, the cause of these benign economic conditions seems to have been less the brilliance of central bankers and economic policy makers as a happy confluence of factors beyond their control globalisation, information technology and the Asian development story.

We may now be entering altogether less comfortable waters. Today's inflationary pressures do at least seem to be demand-led, unlike those of the 1970s, which came from the supply-side shocks of oil price hikes. Yet it may only be a matter of time before we see the return of platform heels and disco dancing.



Householders demand relief

The great thing about being in opposition is that you can clamber aboard any old populist bandwagon you like and trumpet it to your heart's content knowing that you are never likely to have to pick up the tab. Thus it is that David Cameron wants to see banks and building societies help out with mortgage borrowers who are struggling with a sudden increase in repayment costs.

In a speech to the Council of Mortgage Lenders, the Tory leader pointed out that, as fixed rate deals struck when interest rates were low get refinanced into higher-cost mortgages, many householders, already hit by rising taxes, energy costs and food prices, will struggle with their repayments.

Mr Cameron stopped short of proposing the orchestrated housing bailout which the Bush administration is facilitating in the US, but it wasn't far off. Labour still seems to be in a state of denial about the seriousness of the approaching squeeze for consumers and householders.

Instead, the Government wants everyone to believe that the glory days of economic expansion have just been temporarily interrupted by factors beyond its control with normal service to be resumed some time early next year. The last thing ministers want to do is admit that crisis measures have become necessary to avoid a housing slump.

In fact what Mr Cameron is calling for is what most mortgage lenders will be doing anyway. In the US, mortgage lenders have voluntarily agreed to allow borrowers who can't pay to stick with their introductory rates for the next five years because from their point of view it is better to get a little in the way of mortgage repayments than have to foreclose and get none at all.

The same logic will be applied by lenders in Britain as borrowers start to fall behind with their payments. The Council of Mortgage Lenders warned yesterday that the average cost of servicing a mortgage had already risen as a proportion of disposable income to its highest level since the early 1990s as a result of the crisis in financial markets. This is a situation which can only get worse as the plethora of fixed- rate deals sold two years ago when interest rates were low comes to an end.

Michael Howard, when still leader of the Conservative Party, once told me that the main difficulty in challenging Labour's political supremacy was the strength of the economy. As long as this remained the case, it would always be an uphill struggle. But in his view, the Achilles heel was the housing market, which even then was plainly out of control. Too late for Mr Howard's political career, his hopes are finally coming true.

It is still hard to tell quite how bad the downturn is going to be, but the best bet remains that it won't be nearly as serious as the early 1990s. Still, for many it is going to feel quite bad enough, and, after all the years of plenty, even a couple of years of belt tightening will politically be highly dangerous to Gordon Brown and his chances of re-election.

Is it right that householders be allowed to escape the consequences of their own folly by being forgiven having to pay the going rate for credit? The moral hazard argument is the same as that which has been put by Mervyn King, the Governor of the Bank of England, in regard to banking bailouts. Borrowers allowed to think that when the going gets tough there will always be a safety net to prevent them from falling will be encouraged into ever more reckless behaviour.

Part of the catharsis of a financial correction such as the one we are going through is that the market gets purged of its excesses, allowing new buyers to enter the game and progress to begin anew. If events are not allowed to take their course, then the market will stagnate and the fundamentally uneconomic will persist.

Lenders are entitled to make up their own minds on whether it is better to forgive interest than risk default. Politicians should stay out of the process.



Xstrata's Davis calls top of the market

Xstrata has put a giant "for sale" sign in its shop window in the apparent hope of generating a bidding war between Anglo American and Brazil's Vale. Xstrata's chief executive, Mick Davis, told an investor conference last week that he had fully bought into the consolidation argument for mining companies following BHP Billiton's offer for Rio Tinto and stood ready to play his part.

If an operator as forceful and dynamic as Mr Davis says he is willing to sell, what does this tell us about the state of the commodities cycle? Perhaps nothing at all, but it may also mean he's calling the top of the market. According to analysis by Credit Suisse, it would make little sense for Xstrata to bid for Anglo American and it probably couldn't bid for Vale even if it wanted to. For Xstrata, the smaller of the two companies, to bid for Anglo would both stretch the balance sheet and be less earnings accretive than the other way around.

All the same, for Mr Davis, one of the most aggressive players in the industry, willingly to submit to being taken over by someone else is an uncharacteristic turn of events which no one would have thought remotely likely were it not for the fact that it appears to be true.

Mr Davis has certainly got the ego to believe he could both persuade Anglo to pay a premium for his company and take the top job at the combined beast, yet this would surely stretch credulity too far. Even the good natured Sir Mark Moody-Stuart, Anglo American's chairman, would draw the line at such an act of prostration.

If Xstrata were acquired, Mr Davis would have to go. He's not the type to submit to someone else's rule, and certainly not that of Cynthia Carroll, whose elevation to the chief executive's suite at Anglo he regards with complete bemusement. So yes, it appears that he is indeed calling the top of the market.

j.warner@independent.co.uk

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