Magazine article American Banker

Fed Rate Cut Jolts Markets to Life; BanksLead Rebound

Magazine article American Banker

Fed Rate Cut Jolts Markets to Life; BanksLead Rebound

Article excerpt


The Federal Reserve electrified financial markets Thursday with a fresh cut in interest rates just two weeks after its previous move.

In a rare action between meetings of its monetary policy committee, the Fed sliced the overnight federal funds rate by a quarter-point, to 5%. And it reduced its own discount rate to 4.75%, also by a quarter point.

News of the Fed's decision hit Wall Street's trading desks at 3:15 p.m. Bank stocks led the market's jubilation, with the Standard & Poor's bank index soaring 5.7% in value, while the Dow Jones industrial average rose 4.2%.

Lower rates are seen as benefiting banks because they relieve debt servicing pressure on borrowers and stabilize credit quality.

The Dow, which was ahead 105 points just before the Fed's announcement, doubled its gain in three minutes. It closed the day up 330.58 points, to 8299.36, moving back past the 8200 mark for the first time since Aug. 26.

The yield on the Treasury's benchmark 30-year "long bond," which had been hovering just above 5% after a traumatic week of trading, immediately dropped to 4.96%. The yield on the 10-year treasury, a key for mortgage rates, fell to 4.41% from 4.57%.

The Fed's move surprised almost everyone. Most economists applauded the move while a few said domestic economic conditions did not appear to warrant such a cut.

"This demonstrates that we have a pragmatic Fed, ready to go with the facts and not get hung up on theories," said Nicholas S. Perna, chief economist at Fleet Financial Group, Boston. "I imagine one of their big concerns was to counter the self-tightening of the credit markets we have been seeing lately."

But Robert A. Brusca, chief economist at Nikko Securities, maintained: "The U.S. economy is at full employment. If you look at Japan or Europe, where they have some slack, they're the ones who should be cutting. …

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