USA: Stocks rise on U.S. interest rate cut

The U.S. Federal Reserve cut U.S. interest rates, but said the risk of inflation was roughly equal to downside risks to growth, suggesting further rate reductions are far from a sure bet. The decision to lower the overnight federal funds rate by a quarter-percentage point to 4.5 percent was widely expected in financial markets. U.S. stocks shot higher on Wednesday (October 31), buoyed by the Federal Reserve's interest-rate cut and reports showing surprising resilience in economic growth and employment. The Federal Reserve cut its benchmark interest rate, the overnight fed funds rate, by 25 basis points to 4.50 percent, as expected. The Fed also cut the discount rate it charges on direct loans to banks by 25 basis points to 00 percent. "I think today's action and their statements is a recognition that the weakness in housing may perpetuate for a while and is something that they're very much worried about," said economist Maria Fiorini. For the housing market, the cut could provide some relief. The higher rates and decreased bank liquidity have caught many off guard. But while an interest rate cut is almost always welcome in the housing sector, its effect on Wall Street and Main Street is not always cut and dry. CEO of Manhattan Mortgage, Melissa Cohn said, "Unfortunately many people believe that if the Fed cuts rates that everyone's mortgage rates will automatically go down. Unfortunately that's not the case. First of all, if you already have a mortgage, be it an adjustable or a fixed rate, your rate will not reset just because the Fed has cut rates, and mortgage rates are tied to the bond market and not to Fed funds and not to the prime rate so it's really how the markets react and how the bond market reacts to the Fed's action that will determine where mortgage rates will go." As for how the cut effected Wall street, according to the latest data, the Dow Jones industrial average was up 137.54 points, or 1.00 percent, to end unofficially at 13,930.01. The Standard & Poor's 500 Index was up 18.36 points, or 1.20 percent, to finish unofficially at 1,549.38. The Nasdaq Composite Index was up 42.41 points, or 1.51 percent, to close unofficially at 2,859.12.

ITN Source | November 1, 2007

Tags:. .decision. .surprising. .risks. .prime. .economic