World markets rise on US rate cut

Japan is keeping a close eye on US stock markets

Financial markets have closed sharply up after the US Federal Reserve cut interest rates for the first time in four years.

At close all three major US share indexes were ahead; the Dow Jones up by 0.55% and the Nasdaq 0.56% higher. The broader S&P was also ahead by 0.61%.

In Europe, London's FTSE 100 closed 2.81% higher, while French and German markets gained 3.27% and 2.32%.

The Fed cut its benchmark federal funds rate from 5.25% to 4.75% on Tuesday.

Earlier in the day Japan's Nikkei index closed up 3.7% while Hong Kong's Hang Seng index climbed 4.2%.

Analysts had expected a cut to prevent a housing market downturn and the credit crunch from denting the economy, but the size of the cut surprised many.

Some had also argued that the Fed should leave rates on hold in order to focus on controlling inflation.

One-off?

The tightening of credit conditions has the potential to intensify the housing (market) correction and to restrain economic growth more generally US Federal Reserve Fed cuts US rates The Fed's statement in full Japan keeps rates on hold

Japanese investors carefully watch the US economy because it is Japan's biggest export market.

Concerns that recent woes in the US mortgage market may hit US economic growth have depressed Japanese share prices.

In Tokyo, where Japan's central bank kept interest rates on hold on Wednesday, the Nikkei 225 index jumped 579.74 points to close at 16,381.54 points, having lost some of the momentum seen in morning trading.

"The market is now watching to see if Wall Street rallies again, or if yesterday's moves were a one-off thing, with attention on brokerage earnings results," said Yutaka Miura, a senior technical analyst at Shinko Securities.

The Hang Seng index closed up 977.8 points, or 4%, at 25,554 while India's Sensex added 4.2% to close at a record high.

US shares had also performed well immediately after the Fed's move on Tuesday, with the three main indexes closing that day ahead by between 2.5% and 2.9%.

'Need to act'

By making money cheaper to borrow, the central bank is hoping that people will spend and invest more, revitalising the economy,

By cutting rates the Fed would be boosting the US economy by making it cheaper to borrow money Send us your comments Q&A: What the rate cut means

But the Fed faces a dilemma, with some commentators worried that too-big rate cuts could stoke up inflation.

A reduction in rates by 50 basis points would fuel inflation and lead to the "cheap money" conditions that have brought boom-and-bust to the property sector, they had argued.

But in a statement, the Fed said that they needed to act before the credit crunch caused more damage to the economy.

It said that "the tightening of credit conditions has the potential to intensify the housing (market) correction and to restrain economic growth more generally".