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HONG KONG: The US Federal Open Market Committee(FOMC) meets in Washington on Tuesday, amidst speculation of a possible cut in interest rate.
In light of upheaval on Wall Street, markets are now betting that the Fed will be forced into a quarter point cut to the federal funds rate.
America's largest insurance group AIG has been thrown a US$20 billion life-line.
From a 9 per cent chance of a rate hike last week, the futures market is now predicting a 68 per cent likelihood of a 25 basis point cut.
Many believe that bread and butter issues like inflation will be overshadowed.
An analyst from Ample Capital, Kelly Tong, said: "We expect the FOMC to cut interest rates, because it can provide some liquidity to the market. In fact, it is the right time to cut interest rates because oil has fallen to the $92 level and the inflationary rate is already relieved."
The US central bank last lowered rates in April, which was its seventh rate cut since 2007. The overnight lending rate to banks currently stands at 2 per cent.
Regardless of any rate cut, the US economy is sliding into a recession, and prospects for a quick return to decent growth remains bleak.
Managing director of Fitch's Financial Institutions Group, David Marshall, said: "As the problems work through the US economy, the downturn is resulting not only in default on subprime mortgages, the losses are spreading - from subprime to even prime mortgages, as people lose their jobs and can't pay.
"And it'll spread to credit cards and onto loans. And this will have a negative impact on US banks over several months, well into next year."
In the meantime, Asian policy makers have been busy trying to calm the markets with cash. Central banks dished out nearly US$27 billion, following the US Federal Reserve's US$70 billion injection on Monday.
Marshall said: "The central bank action is helping to prevent any short-term liquidity difficulties. But from a longer-term, medium-term perspective, the regulators can't force banks to lend to each other or even other customers.
"What we can see is the risk aversion in terms of credit spreads, some banks are telling us it's becoming more difficult to get funding from wholesale markets."
Fitch is confident that Asian banking systems can withstand the current turbulence, but warned that there could be more pain to come.
Central bankers across the region like in Hong Kong, South Korea and Taiwan have also been quick to give verbal reassurances. China also surprised with its first rate reduction in 6 years and may cut again to spur its economy.
- CNA/yt
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