Tuesday, September 18, 2007

Federal Reserve Cuts Fed Funds Rate

The Federal Reserve lowered a key interest rate by a more than expected 50 basis points. That move sent the Dow Jones and all other indices soaring.
Stocks rallied Tuesday after the Federal Reserve cut a key short-term interest rate by a half-percentage point, reassuring investors that it was taking aggressive action amid the credit and mortgage market meltdown.

The Dow Jones industrial average jumped 335 points, or around 2.5 percent, according to early tallies. The broader S&P 500 index gained around 2.9 percent. The tech-heavy Nasdaq composite rose 2.7 percent. The Russell 2000 small-cap index gained almost 4 percent.
Was this sort of exuberance warranted? I woulod think a bold move like this would indicate that the Federal Reserve realizes that the credit problems and the subprime mortgage mess may be worse than previously thought.

Just a few months back the Federal Reserve felt that inflationary pressures were the greatest risk to the economy. A move like this shows they are willing to deal with inflationary issues if it keeps the economy from tipping into recession. Will this move be enough to calm the jittery markets?

This could be helpful for many families facing foreclosure who may now be able to afford the new payments on their loans once they are adjusted. Will enough families be helped to stop the slide in the real estate market? My guess is no. Only time will tell but tomorrow may show that traders realized after the closing bell that the steep cut wasn't reason to rejoice but reason to worry.

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