Asian stocks rebound after Fed rate cut

Asian stocks rebounded on Wednesday after the US Federal Reserve slashed interest rates by 75 basis points - and hinted clearly at more cuts to come - in a bid to arrest the deterioration in the US economy and stem a wave of selling in world stock markets.

In Asia on Wednesday, the MSCI Asia Pacific Index added 2.7 per cent to 135.64 in morning trading in Tokyo, headed for its biggest gain since September 19.

Hong Kong shares raced up 7 per cent at the open, and Shanghai was up almost 2 per cent in the opening minutes of trade. Japan's Nikkei 225 Stock Average surged 3.4 per cent by midsession. Australia's S&P/ASX 200 Index was up 5.3 per cent by early afternoon, halting a 12-session losing run.

The move down to 3.5 per cent was the first unscheduled Fed rate cut since September 17 2001, and its largest single cut since August 1982. The central bank's gambit prompted a rebound in European stocks on Tuesday but did not prevent the S&P 500 from closing lower.

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The Fed had been planning to cut rates aggressively at its scheduled meeting on January 30, amid growing concern that it was behind the curve on monetary policy. But the global sell-off in world stock markets in recent days convinced Fed officials that they could not afford to wait another nine days.

In a statement, the US central bank said "appreciable downside risks remain" - a clear signal that it intends to lower rates again, with another cut likely on January 30.

Peter Hooper, chief economist at Deutsche Bank Securities, said the Fed's move was "unprecedented".

However, Jim O'Neil, chief economist at Goldman Sachs, said the US central bank would have to follow up with a 50 basis point cut on January 30 if it wanted to be "material" and "ahead of the curve".

World markets welcomed the Fed move on Tuesday. In London, the FTSE 100 was up 2.9 per cent, having initially fallen 240 points - 4.3 per cent - at the start of Tuesday's trading. The FTSE Eurofirst 300 was up 2.1 per cent, while Frankfurt's Xetra Dax gained 0.1 per cent and in Paris the CAC 40 was up 2.1 per cent.

Wall Street, which was closed during Monday's global equity rout, fell nearly 4 per cent in early trading as an avalanche of sell orders initially overwhelmed the Fed's move. However, the S&P 500 recovered to close 1.1 per cent lower at 1,310.50

The emergency Fed action represents an urgent effort by the US central bank to get to grips with the rapidly worsening economic outlook. It follows a sudden spate of bad economic data that wrong-footed the Fed and suggested the US might be sliding into recession.

Officials decided on their move at a video conference at 6pm US time on Monday, with one policymaker - Bill Poole, president of the St Louis Fed - dissenting.

In its statement, the Fed said it acted "in view of a weakening of the economic outlook and increased downside risks to growth".

Ken Lewis, chief executive of Bank of America, said the Fed move "gives us a much better chance of avoiding recession".

The yield on the US Treasury two-year note fell 33 basis points to 2.01 per cent, while the inflation compensation on inflation-protected securities edged up.