Fed Cuts to 1%, Volatile Stocks

123jump.com Staff
29 Oct, 2008
New York City

The Fed lowered the Fed funds rate by 50 basis points to 1% in unanimous decision. The Fed is likely to lower rated further if economic activities remain weak. Investors hoping for a cut larger than 50 basis points were disappointed. Nasdaq surged 3% after the rate cut but closed lower.

[R]3:30PM New York – The Fed cut rates to 1%.[/R]

The Federal Reserve in unanimous decision lowered the interest rate by 0.5% to 1%. The Fed hopes that rate cut will spur lending and support consumer spending. The rates are now the lowest since 2003 and 2004 period when the Fed had lowered the rate to prevent the economy from slipping into a recession.

Central bank in China and Norway lowered rates as well. China lowered lending and deposit rates for the third time in less than two months. China has been battling slowing economic growth and in the third quarter the rate declined to 9% from 11.9% in the first quarter of this year.

People’s Bank of China lowered the deposit rate to 3.60% from 3.87% and one year loan rates to 6.66% from 6.93%.

In the accompanying note the Fed said, “The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.”

The Fed is likely to lower rates again, and if rates are cut further then they will be the lowest in six decades. The lower rates are not likely to be that effective as they were during the 2003-2004 period. The current crisis of confidence and insolvency of home owners and banks is not going to be solved with lower rates.

The Fed suggested the recent decline in energy and commodities prices is likely to moderate inflation in coming months.

The Fed noted, “In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.”

Stocks turned lower after the rate cut decision. Investors were hoping for a full one percentage point cut. However after one hour of trading the stocks reached new highs for the day. Retailers, financials and resources stocks rallied. Nasdaq jumped 3% and S&P 500 and the Dow gained 2.5%.