Will Fed Toe the ECB (European Central Bank) line and Cut Bank Interest Rates?

With the European Central Bank reducing its deposit rate to zero, it is widely expected that the Fed will tread along the same line, as it begins its two day meeting today. The move will be aimed at lowering short-term borrowing costs and providing an impetus to the US economy growth.

On July 17, Fed Chief Bernanke had told the congress that Fed is contemplating measures to reduce unemployment rate. In the address he had hinted at lowering the existing bank rates from existing 0.25 percent in order to ensure this. With lower interest to be paid to the Fed, financial institutions can lend money to profitable returns. This would enhance the supply of credit and accelerate growth. However, such a move would be in sharp contrast to Bernanke’s assertions in February last, when he had said that reducing the rate might scare investors from short-term money markets. But the European Central Bank’s decision will embolden him to follow suit.

Many analysts believe that in the coming meeting the Fed will extend the time frame of low interest rates till the end of 2014. Bernanke had also talked about purchasing large- scale bond to the congress. This in all likelihood will happen later this year.

Meanwhile, while apologizing for its failure to prevent money laundering, HSBC took a $700m charge to meet the cost of possible fines to be imposed by the government. The amount was based on an estimate calculated by the bank taking the prevailing economic situation into consideration. This has, in effect, pushed the bank’s profits down by 3 per cent for first six months till June. The bank also earmarked $1.3bn of funds for the mis-selling of payment protection insurance to its UK consumers including small businesses in Britain.

HSBC also announced that pre-tax profits increased by 11 per cent year on year at $12.7bn. If the $2bn regulatory charges in the US and UK are taken into account then the pre-tax profits has in effect come down by 3 per cent to $10.6bn

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