Fed Cuts Rate, Dow Soars
In a move that Wall Street traders had been calling for and speculating about for weeks, the Federal Reserve made its first benchmark rate cut in four years. As a result, stocks and treasury notes soared, and the dollar sank to a new low against the euro. The rate that was cut is the one that banks use to loan money between each other. The rate had been at 5.25% and was cut .5%, making it a larger cut that many analysts had expected.
A problem that inevitably arises when the Fed cuts the rate is that many see it as a bailout to investors and companies who have been engaging in risky trading, so Ben Bernanke and the rest of the Board of Governers should be in for some rough criticism. Regarding this, an article on Bloomberg.com states:
Today’s move suggests Bernanke’s comment on Aug. 31 that it’s not the Fed’s responsibility “to protect lenders and investors from the consequences of their financial decisions” may be little more than talk for now, said Neal Soss, chief economist at Credit Suisse in New York.
Criticism aside, the markets enjoyed a big day, with the Dow ending up 335 points (2.9%), and the Nasdaq gaining 70 points, or 2.7%. Other markets in the Americas enjoyed the news as well, Brazil’s Bovespa gained a whopping 4.2% on the day, and Mexico’s Bolsa rose a healthy 2.7%.
One stock that particularly benefited from the rate cut was Lehman Bros. The brokerage and investment giant had been hit hard recently by the subprime crisis, but the news of the cut sent LEH shares up over 10% on the day.
