Fed Cuts Rate By Half A Point
by: Vikas Bajaj, NY Times

There was something for just about everyone in the Federal Reserve’s decision yesterday to cut its benchmark interest rate by half a point (from 5.25% to 4.75%).

For homeowners, it could lead to lower mortgage rates in the months to come. For investors, it could help stabilize and bolster volatile share prices. For Wall Street financiers and for companies across America, it could eventually make borrowing easier and cheaper.

“This is a bold move,” said James T. Swanson, chief investment strategist at MFS Investment Management, a mutual fund company in Boston. “It’s going to alleviate concerns that the credit market will kill the economy.”

The rate cut, to 4.75 percent, was twice as large as most investors had expected, and it showed in the market’s reaction. The Standard & Poor’s 500-stock index rose 2.92 percent, to 1,519.78, and the Dow Jones industrial average rose 335.97 points, or 2.51 percent, to 13,739.39. It was the biggest single-day gain for both indexes since early 2003.

Many commercial banks followed the Fed and cut the prime rate they charge their best customers for loans. In the commodity markets, gold and oil prices both surged yesterday afternoon. The dollar fell to a new low against the euro.

Investors in the futures market are now betting that the Fed will cut rates at least once more this year, to 4.5 percent, at the meeting in late October. But the central bank was more guarded. Noting that “some inflation risks remain,” the Fed said that its actions would have to balance concerns about slowing growth against the threat of inflation.

For the broader economy, changes in the Fed’s target short-term interest rate, which banks charge one another, usually takes several months to a year to have a noticeable impact.

The average rate for a 30-year fixed mortgage stood at 6.31 percent last week, down from its high for the year of 6.74 percent in June, Freddie Mac said. The rate could fall further if the Fed’s move and statement encourage investors to buy more mortgage-backed securities, which are used to finance loans.

To read the full article go to: http://www.nytimes.com/2007/09/19/business/19cnd-markets.html?_r=1&adxnnl=1&oref=slogin&adxnnlx=1190223776-8XlJtNOrYT07wNcOxCRmYA