Fed Cuts Loan Rate to Banks, Dow Loves It
On Friday the U.S. Federal Reserve cut a half a point off its loan rate to banks, going from 6.25% to 5.75% and the markets responded in a huge way, with the Dow spiking up to more than 300 points after the opening bell. It closed the day over 200. The rate cut was something that Wall Street had been clamoring for for days, and Friday they got their wish. The lowered rate is aimed at helping businesses, banks, and lenders, but won’t have much of an effect on consumer spending.
Bank stocks and other financials certainly met the move with approval, and their share prices showed. India’s ICICI Bank (IBN)’s shares shot up nearly 13% on the NYSE on Friday. Argentina’s Banco Frances (BFR)’s shares were up over 10%, after dropping significantly during the week. U.S. financials also posted impressive gains, with Lehman Bros. (LEH), Goldman Sachs (GS), Mastercard (MA), and Bear Stearns (BSC) all ending in the green.
Although the bleeding has stopped for the time being, and the rate discount was a much needed boost, the crisis still may not be over. The rate cut dropped the dollar against most of the world’s major currencies, and a weak dollar means trouble for everyone. With less buying power, U.S. consumers have a harder time buying imported goods, and Asian markets could still be jittery come Monday.
One real problem of this credit crisis is that it is very difficult to tell who is involved in the subprime crisis and how deeply. Companies such as Countrywide (CFC) still face a very real chance of going bankrupt. If that happens, the action of this week could just be the start of a longer sell-off, as the banks and other lenders that are tied in with CFC are affected as well.
