FED CUTS RATES TO 1.0%

Another major cut, and a (mostly) minor market reaction.

As expected, a 50 basis point cut. On Wednesday, October 29, the Federal Reserve reduced the benchmark U.S. interest rate half a point to 1.0%, by a unanimous 10-0 vote of the Federal Open Market Committee. The FOMC also voted 10-0 to lower the discount rate half a point to 1.25% (the interest rate banks pay on direct loans from the federal government).¹

The stock market … shrugs. As noted, the half-point cut was widely seen as a given. That anticipation helped rev up the markets Tuesday, when the Dow Jones Industrial Average gained 889 points.² Wednesday saw some volatility: some traders had hoped for an even greater rate cut, and the market was actually up about 1% before the Fed’s move was announced.³ Up 280 points at one moment, the Dow finished with a 74-point loss on the day, as the S&P 500 fell 10 points and the NASDAQ made a 7-point gain.⁴ A statement by General Electric’s CEO noting that GE was aiming for flat profit in 2009 fueled a late-day market drop.⁵

The commodities markets … soar. When you cut interest rates, the dollar weakens. Commodities commonly react by going north. Oil futures rose almost 9% Wednesday, finishing close to $69 per barrel on the New York Mercantile Exchange. Gold rose nearly 4% and silver almost 10% on a fine day for precious metals, oil, sugar and grains.⁵

Perspective. The Fed has now cut interest rates by a full point in October. The FOMC policy statement hinted that further cuts might come. You can’t go a whole lot lower – not since 2003 have rates been as low as 1%.⁶ Yet the FOMC said it “will act as needed to promote sustainable economic growth and price stability”, and Wall Street Journal economics editor David Wessel told National Public Radio Wednesday that traders and market analysts hold expectations that the federal funds rate could fall to 0.5% by the end of the year.⁷

Will this help? The last half-point rate cut didn’t make much of an impact on Wall Street, but who knows – this one might. In fact, it certainly helped to inspire the relief rally on Tuesday. So, how are things looking for you? If you haven’t checked in with your financial advisor lately, this might be a good time to do so and refine your financial strategy.

These are the views of Peter Montoya Inc., and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information.

Citations.

¹ thestreet.com/story/10444893/1/fed-cuts-key-rate-by-half-point-to-1.html?puc=googlefi&cm_ven=GOOGLEFI&cm_cat=FREE&cm_ite=NA [10/29/08]