Interest Rates Go Down — Stocks Go Up
Kurt Brouwer October 31st, 2007
The Federal Reserve acted today to cut short-term interest rates again. That move was the catalyst for a rally in the stock market as this piece reports [emphasis added]:
Feds Lower Funds Rate By Quarter Percent (National Public Radio - npr.org -, October 31, 2007,
‘ The Federal Reserve Board lowered the cost of borrowing Wednesday with a quarter-point drop in rates in hopes of energizing an economy troubled by a sagging housing market and soaring oil prices.
The new federal funds rate of 4.5 percent makes it cheaper for consumers and businesses to borrow money.
It is the second reduction this year in the federal funds rate — charged on overnight loans between banks — and was widely expected.
In September, the Fed slashed the federal funds rate by a half-percentage point to 4.75 percent in hopes of boosting the ailing housing market and buoying the overall economy…’
This move was widely expected, but that does not mean it was unimportant. In fact, had the Fed not cut interest rates, the lack of action would have been viewed as negative by the financial markets. This article spells out what happened:
Anything But Spooked, Stocks Rally (MarketWatch, October 31, 2007, Kate Gibson)
‘U.S. stocks resumed their rally Wednesday after the Federal Reserve’s interest-rate decision, offering Wall Street just what it had been clamoring for, a quarter-point cut to 4.5%…
…Stocks first lost steam immediately after the decision, as the central bank signaled no immediate need for further cuts by emphasizing that inflation risks balanced out risks to economic growth…’
The S&P 500 ultimately gained 1.2% today after some ups and downs. However, this may be and probably should be the last Fed-inspired stock market rally for a while. The Fed signaled its intentions to sit on the sidelines for a while. The article continues:
‘… “Tomorrow we’ll realize we’re in neutral territory, and further rate cuts aren’t a sure thing. But right now it’s like the Red Sox won the World Series and we’re going to have a parade,” said Art Hogan, chief market strategist at Jefferies & Co. “But the market still got what it wanted. It sees the Fed as behind the curve, but on the side of the economy, with the demise of the housing market having intensified,” Hogan said…’
We seem to be seeing two opposite trends here. First, stocks are climbing a ‘wall of worry’ and despite many issues, they keep climbing. The economy, interest rates and inflation seem to be fine despite many problems as well. Yet, we are also seeing a weak dollar (primarily versus the Euro) and with that we have soaring prices for commodities such as oil and gold. Typically, higher commodity prices signal impending inflation although, as noted above, that has not happened yet. My instincts tell me that the economy will muddle through this credit crisis by early next year and then the long-term trend will become clearer. We shall see.
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