US stocks sold off as Fed lowers growth forecast

The US Federal Reserve last night revealed it had lowered its 2008 growth forecast, prompting a sell-off in US stocks after European equities had enjoyed a solid rebound earlier in the day.

The dollar meanwhile continued its declines, falling to a fresh all-time low against the euro as a result of concerns about the state of the US economy, hitting alow of $1.48 to the euro.

Minutes of the Federal Reserve's October 31st meeting released after European markets had closed yesterday showed that the central bank believes economic growth could slow to as low as 1.8 per cent, according to the middle range of forecasts. This compares with growth forecasts of between 2.5 and 2.75 per cent anticipated in June.

"Most members saw substantial downside risks to the economic outlook and judged that a rate reduction at this meeting would provide valuable additional insurance against an unexpectedly severe weakening in economic activity," the minutes said. "Many members noted that this policy decision was a close call."

There was also disappointing news on interest rates with the Federal Reserve saying it no longer believes that the US economy can grow at much more than 2.5 per cent a year without generating rising inflation.

The downbeat assessment means that the Fed is less likely to respond to the anticipated lower growth levels with interest rate cuts. The Federal Reserve last cut cut the benchmark lending rate by a quarter point on October 31st to 4.5 per cent, after a half-point move in September.

Earlier in the day, European markets staged a welcome rally, rebounding from a three-month low, but the Iseq was an exception.

The index fell more than 3 per cent before recovering some ground to close down 1.7 per cent, a decline that wiped €1.6 billion of its value.

Dublin dealers said that Ireland was simply out of favour at the moment and that selling the Irish story had become very difficult. Still, news that AIB Mortgage Bank, a unit of AIB, had pulled a €1 billion sale of covered bonds because of market volatility didn't help matters.

A spokesman for AIB said that given the current volatile market conditions the bank had decided it was prudent to pull the sale, which was actually part of a larger €15 billion covered bond programme, of which €7 billion has already been sold. The latest tranche was for three years and was being arranged through BNP Paribas, Barclays Capital and Deutsche Bank.

Covered bonds are notes backed by mortgages or loans, in this case Irish mortgages, to public institutions. They differ from asset-backed securities in that they remain on the borrower's balance sheet, and the borrower is liable for the debts if the assets are not sufficient. The recent sharp increases in Euribor rates - up more than 6 per cent since August when the so-called credit squeeze began - have made selling such debt more difficult.

- (Additional reporting, Bloomberg/ Financial Times service)