Cut in Key Interest Rate Has Immediate Effect

[Oct 16, 2007.]

The decision by the Federal Reserve to cut a key interest rate had an immediate impact on Wall Street.

When the Fed sliced a significant interest rate by half a point, the market responded with a surge of more than 330 points. That was the largest single day rise in the market in close to 5 years.

The size of the interest rate cut had actually come as a surprise to investors. While many were hoping for a rate reduction, they weren't figuring on a cut of a half-point. As a result, the rate cut came as a pleasant, though unexpected, turn of events.

Meanwhile, the Fed responded to the large-scale credit crunch by stating, "the tightening of credit conditions has the potential to intensify the housing (market) correction and to restrain economic growth more generally."

Following the rate cut, the Dow Jones Industrial Average increased 336.05 to an impressive 13,739.47. The Dow hadn't had such an encouraging rise since October of 2002. Interestingly enough, the Dow is now just a little less than 2% below its record July close.

On the heels of the news about the rate reduction, the S&P 500 index soared 43.13 to 1,519.78. Meanwhile, the Nasdaq composite index increased 70 points to 2,651.66.

The Fed is offering no indications that it will cut rates further. However, Fed officials noted that some risks of inflation remain and that they plan to stay on top of the situation. Still, the Fed did not refer to inflation as its "predominant policy concern."

Some economists now believe that the Fed is undergoing a shift - from worries about inflation to worries about financial markets. Obviously, the housing market also continues to be a major concern. Some financial experts predict there will be no turnaround in the housing market until the middle of 2008.

Julie Ann Amos
October 16th 2007

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