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Fed Alert is Red Alert

• Robert Peston
• 22 Jan 08, 02:00 PM

There were rumours sweeping the markets all morning of a looming interest rate cut from the US.

And the is intrinsically disturbing: some investors will have made a killing (though they would have had to move fast if they were trading shares, since the FTSE100 has fallen again, having briefly rallied).

To state the bloomin鈥� obvious, central banks are not supposed to leak.

Here are other reasons to be worried, in spite of the Bernanke bounce in stock markets.

What the Fed has done looks like panic.

It hasn鈥檛 cut rates as much as three quarters of a percentage point for as long as I can remember.

And it made the decision to slash a week before its scheduled meeting.

If it looks like panic at , smells like panic at the Fed, and quacks like panic at the Fed, well many will say it is panic at the Fed.

And what if the evasive action doesn鈥檛 work?

What if, after the Bernanke bounce, stock markets continue to fall, financial markets remain relatively illiquid, banks remain reluctant to lend and the US economy continues careering towards recession?

Then the players in the global financial souk will begin to fear that the US authorities 鈥渉av鈥檔ae got the power鈥�, to quote Scotty.

Which, in the battle between the doom-mongers and the optimists over prospects for the global economy, would represent a disturbing victory for the forces of darkness.

UPDATE 15:19 Oh dear, the Bernanke bounce was short-lived in Europe and non-existent on Wall Street.

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World laid bear

• Robert Peston
• 22 Jan 08, 10:35 AM

The technical definition of a bear market is a drop in a leading market index of 20 per cent from its high.

On that measure, and after the falls of the past couple of days, there are already bear markets in France, Mexico and Italy.

After the first impact of the crisis in money markets in the autumn, Japan and China entered a bear market phase last November.

In fact, according to research by Bloomberg, some 43 stock markets have slipped from bull to bear.

And as for developed markets as a whole, as measured by the MSCI World Index, they are down 17 per cent on average from their 31 October high.

So I think we can safely say that the stomping, snorting optimistic beast of a market is fleeing the field, to be replaced by something scary and grizzly.

In the UK, at one point this morning shares were showing a fall of a fifth in their value on average since just the start of this year.

But volatility is the order of the day. In London there has been a stunning bounce, which could yet turn out to be ephemeral.

Having worked at assorted times on trading floors, I can smell the adrenalin, testosterone and fear that is creating this mayhem.

There are of course fundamental reasons to be worried.

I have written and broadcast extensively about the painful transition we are living through from liquidity crisis to solvency crisis, from credit crunch to asset deflation, from money market malfunction to global economic slowdown.

It started last summer as a crisis of confidence among banks and financial institutions, which led them to rein back the credit the provided to each other and then to all of us.

But what has been profoundly shocking is how the effect of that credit squeeze has been amplified by a self-reinforcing feedback mechanism which has seen the recession in the US housing market pulverise first the value of the alchemical securities manufactured out of sub-prime and then the balance sheets of banks and insurers.

And in the vicious cycle of decline, the flaws in the financial system ignored during the bull-market euphoria are now being exposed. As you know, I have been particularly worried for some time about the fragility of the so-called monoline insurers - and the threat that their woes will lead to massive losses for investors in the bonds they insure.

My fears became very personal yesterday when the disarray at , a leading monoline, led to falls in the price of bonds of my beloved Arsenal.

Few of us are immune from what's going on. Whether you are saving for a pension, a direct investor in shares and bonds, or a Chancellor of the Exchequer dependent on tax revenues generated by the City, you would be right to feel a bit poorer this morning.

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