USA: U.S. stocks rise but Federal Reserve-led rally loses steam

U.S. stocks rise after the Federal Reserve unexpectedly cut the discount rate in a move to keep credit flowing, but market euphoria fades by midmorning as major U.S. stock indexes had cut their gains in about half. Before the stock market opened, the U.S. Federal Reserve said it cut the discount rate by half a percentage point to 5.75 percent, sending world stock markets sharply higher. But by midmorning major U.S. stock indexes had cut their gains in about half. The U.S. dollar fell against the euro and other major currencies as some dealers said the move by the Fed could be interpreted as a step toward cutting its benchmark interest rate. Drew Matus, senior economist at Lehman Brothers said that the Fed's move was the right one. "What they did was actually about as little as they could do, you know, given the circumstances. So I think it was the right thing to do at the right time," he said. While it took no action to lower the federal funds rate, the policy-setting Federal Open Market Committee said it was monitoring conditions and was "prepared to act as needed to mitigate the adverse effects on the economy arising from the disruptions in financial markets." Matus expects that the discount rate cut will prove to be a successful step to "unclog the credit channels" and help to ease growth concerns. Markets have been battered by fears of financial instability following troubles with risky U.S. mortgages and a squeeze on credit that had already prompted central banks, including the Fed, to pour money into the financial system. Many long-term investors and analysts, however, continue to maintain that economic fundamentals bode well for the future and stock losses may turn out to be a good buying opportunity.

ITN Source | August 18, 2007

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