By Anne D. Picker, International Economist,Econoday
Monday, May 21, 2001

After all the dithering, the Federal Reserve did what was expected and lowered the policy making fed funds rate 50 basis points to 4 percent. This is 50 basis points below the European Central Bank's rate and 125 basis points below the Bank of England's rate. Investors showed virtually no reaction until the day after, when equities soared in the United States and almost everyone else followed suit. Although more subdued, the positive effect carried into Thursday and Friday despite some profit taking.

Only the Nikkei, Hang Seng and Singapore Straits of the indexes followed here were down on the week. Asian-Pacific investors were cautious ahead of a weekend announcement from Morgan Stanley Capital International about the re-weighting of its indexes. MSCI said that it would adjust its indexes to a free float weighting over the coming year. Its new indexes will only reflect shares that are freely tradable, so they won't include stock held by other corporations, governments, company founders and family members. The final rebalancing and full adoption of the free float system won't occur until May 31, 2002.

The Bank of Japan met Friday and though they didn't tinker with interest rates, they did broaden the purchase plan of Japanese bonds in order to inject money into the banking system. The Bank of Japan said it will buy bonds with maturities of two, four, five and six years on top of the 10 and 20 year bonds it already buys as part of its regular debt purchases. The bank has few tools left at its disposal to prop up the economy, having already returned to the zero interest rate policy of last year. The changes come as the bank has failed 13 times this month to get enough bids from banks to sell securities it offered to buy. Banks are already flooded with cash and demand for loans has fallen for 39 straight months. They see little need to have more money on hand.

In its quarterly inflation report, the Bank of England said the British economy will grow more slowly than expected for the rest of this year and inflation rates will rise at a slower pace. This means that the Bank, having already issued three 25 basis point cuts this year, remains ready to reduce rates further in the face of economic slowdowns around the world. The bank is worried less about the underlying British economy than about the threat to it from abroad, particularly from the United States.

Introduction   •   Global Stock Market Indexes   •   Recap of Global Markets   •   Currencies   •  Indicator Scoreboard

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