Federal Reserve Cuts Interest Rates Again
Kurt Brouwer January 22nd, 2008
The Federal Reserve is scheduled to meet next week and was widely expected to cut short-term interest rates by 1/2 percent or 50 basis points. However, in a surprise move the Fed cut interest rates by 75 basis points today, shortly before the opening bell on the New York stock exchange. The Fed Funds rate is now 3.5%, down from 4.25%. The consensus view on why the Fed acted between meetings was that world stock markets took a huge tumble yesterday when our stock markets were closed due to observance of Martin Luther King, Jr. Day. This weakness combined with the poor jobs report for December seemingly led the Fed to act (see Stocks Fall On Weak Employment Growth Data).
The Fed’s move certainly surprised the financial markets and that may have been the goal. Fed Chairman Ben Bernanke has stated in the past that effective Fed policy should be surprising from time to time. Chalk up one for the surprise factor. Recently, the Fed had been criticized for inaction (see Revered Monetary Authority Slams Federal Reserve’s Inaction). Some analysts consider this a reactive move to quell weakness in global stock markets. Others, believe this was excellent and that the Fed needs to cut rates a few more time, specifically next week at the scheduled meeting.
At the opening, the Dow Industrial Average was down 460 points and it looked like a rout. However, bargain hunters began coming in and snapping up financial stocks as well as retailers. The stock market recovered a fair amount of the downturn, closing the day down almost 133 points on the Dow or 1.10%. The S&P 500 was off by 1.10% also and NASDAQ fell by just over 2%.
It was quite interesting watching the action early this morning. At the low point, the only significant buying I saw came in to battered financial and retailing stocks. Specifically, bond insurors Ambac and MBIA had a nice bounce as did many other financial stocks such as Countrywide, Washington Mutual, Morgan Stanley and Bear Stearns. Also, retailers such as Home Depot had good days as well. For both groups, it has been a long hard slog. No telling whether or not, this marks a bottom in these beleaguered stocks, but it certainly indicates that there is buying interest at the right price.
One potential signal that we are nearing the bottom is that some of our favorite mutual funds recently re-opened. They are anxious to put new money to work at these depressed valuations. Third Avenue International Value (TAVIX) and Third Avenue Real Estate (TAREX) recently reopened. And, one of our favorite value funds, Longleaf Partners (LLPFX), re-opened last Friday, January 18. In a statement, the Fund announced,
“…The Fund’s managers have identified investment opportunities totaling approximately $1.5 billion between new investments and existing holdings that are significantly discounted. Recently we have encouraged existing shareholders to join Southeastern’s employees in aggressively adding to their stakes in Longleaf Partners Fund. New inflows have totaled $730 million since mid-November. As the market has declined further, the opportunity set has become even more compelling and we are pleased to present the chance for new investors who have waited patiently to become our investment partners…”
I believe the recent market decline has already discounted an economic slowdown and in some industry groups and individual companies, it has already discounted a severe recession. While it never feels comfortable to invest in a declining stock market, opportunities are greatest when prices are most undervalued and expectations are lowest. I believe we are in such an environment now.
- Economy , Geopolitics , Investing , Money , Mutual Funds
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Do you think the Fed will cut the rate again? It’s interesting to see what the stock market does especially since it’s a measure of all investors collective behavior.
Yes, the Fed will almost certainly cut rates again. At this point, there is an assumption that the Fed will cut, so stocks would probably tumble a bit if the Fed did not cut rates at its upcoming meeting next week.
when does the Fed meet again and do you think mortgage rates will be cut again? thank you
Beth–technically, the Fed does not set mortgage rates, but rather the Fed Funds rate. This is a short-term interest rate. However, when short-term rates fall, mortgage rates tend to drift down as well. The next regular meeting of the Federal Open Market Committe is on March 18, but if needed rates can be cut at any time.