Why the Fed looks to be fighting a losing battle

Fed cuts; Barings case; BAA's silence
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The Independent Online

The last time American interest rates were this low, John F Kennedy was yet to visit Dallas, Bob Dylan was Blowin' in the Wind, and Wal-Mart had not opened a single store. The question, of course, is whether last night's cut in the cost of borrowing, the ninth reduction by the Fed this year, will be enough to save the US economy and, by extension, the rest of the world, from recession.

Last month's snap reduction in US rates was an attempt to underpin the stock market as Wall Street opened again for the first time since the attack on the twin towers. Yesterday's cut, again the full half-point, takes rates down to a level not seen since 1962 and is designed to bolster American consumer confidence as the bombs begin to fall on Afghanistan.

The Bank of England looks certain to follow the Fed's lead tomorrow and if it needed any further nudging, the dire warnings about the state of UK manufacturing from the Engineering Employers ought to have been enough.

Whether the Monetary Policy Committee it will be quite so bold in the size of the interest rate reduction it announces is a harder call to make.

But the size of the reduction aside, the difficulty the two sets of policymakers face is that no amount of rate cutting may prove enough to influence market or consumer sentiment. The Fed implicitly recognised as much in the statement accompanying last night's rate cut which spoke of the "unusual forces" which were restraining US consumer demand and which had "significantly heightened uncertainty in an economy that was already weak".

The crisis sparked by the assaults on America – and the threat of similar outrages in Europe and elsewhere – make it much harder for monetary easing or a big fiscal stimulus to have the desired effect.

That much is clear from the response in the US to the rate cut which followed the attacks on New York and Washington. Since then, stock prices have fallen, consumer confidence has plunged and unemployment has hit a nine-year high.

There was little to cheer Wall Street in the Fed's prognosis. Its belief that the long-term prospects for productivity growth and the economy remain favourable was overshadowed by the frank admission that business and consumer confidence is flat on its back. In these circumstances, companies and households batten down the hatches and become intensely risk-averse.

Much, of course, depends on how the war against terrorism is prosecuted from here, with what intensity and for how long. But it is becoming difficult to bet against a recession.

Barings case

Mr Justice Evans-Lombe has been furnished with a currency calculator and a wet towel to wrap around his head while the more arcane aspects of put and call options trading are explained to him. Perhaps he has also been given a signed edition of Nick Leeson's autobiography and a copy of the Bank of England report into the financial scandal he caused.

Welcome to the second great Barings trial, the one involving the auditors, not the rogue trader. As wastes of money go, the case ranks right up there alongside the Millennium Dome and the second phase of the Channel Tunnel Rail Link. At least in this instance, it is not taxpayers' money which is being frittered away but that of well-heeled accountancy firms.

If it lasts the course, then KPMG versus PwC and Deloitte & Touche, promises to break all sorts of records.

It is being housed in a special annexe of the High Court the size of a five-a-side football pitch, it will take the best part of a year to hear and there is more supporting documentation than you can shake a stick at. The cost? Let's call it £100m. But then just think of the potential reward - £1bn in damages.

The Barings scandal is now nearly seven years old and deserves to be consigned to history. The name is nothing more than a brass plate, the senior management have long gone and Lesson has served his time. The investment community has tightened its internal compliance procedures though whether by enough to prevent another rogue trader gambling away his employer's future is anyone's guess. Even the original creditors have departed from the scene.

This case is being fought largely because a group of vulture funds who bought Barings bonds after the collapse sense they could yet make a killing at the expense of the two firms of auditors.

PwC and Deloitte & Touche, are duty bound to put up a show of resistance. But the last thing either of them wants is to have their dirty laundry aired in public for the next six months.

An out-of-court settlement has been within their grasp before now only to be snatched away. If the scurrying to and fro in court yesterday is any guide, then a deal may yet be struck behind the scenes. Let us hope so, for the sake of Mr Justice Evans-Lombe if no-one else.

BAA's silence

In another court, meanwhile, another set of judges has ruled that it is a basic human right to have a decent night's sleep. This is a dream come true for the millions who live beneath the flight paths into Heathrow and other UK airports. But it is a nightmare for BAA because it may spell an end to a lucrative source of revenue. BAA claims that night flights are strictly limited but anyone who lives in proximity to Heathrow knows there are carriers who break the rules and then pay the fine.

The prospect of an end to night flights had a predictable effect on BAA shares yesterday – they fell again as they have been doing ever since the attack on the twin towers three weeks ago. BAA's response was to issue a mealy-mouthed statement maintaining it was the Government's job to decide whether to comply with the ruling from the European Court of Human Rights.

So no trading statement then? Er, no, not until BAA publishes its September traffic figures a week tomorrow. If BAA has read the exhortation from the Financial Services Authority that shareholders must be kept informed "without delay" of the impact of the US terrorist attacks, then it shows few signs of having taken the message in.

Every quoted UK airline has given investors a detailed explanation of how it is reacting and some, such as the low-cost operator Ryanair, have issued more than one trading statement. W H Smith found time on Monday to spell out the effect of the attacks on on its US airport and hotel concessions, which are hardly the core of the business. Yesterday, Go-Ahead updated investors on the impact the attacks would have on its airport handling operations, even though these represent only a small part of the group.

BAA, however, which owns airports and nothing else, continues to argue that the picture is still unclear and that it does not wish to mislead the market. Perhaps it has bigger worries on its mind. Such as whether a fifth terminal is warranted at Heathrow right now given its shrinking business prospects.

m.harrison@independent.co.uk

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