Fed cuts rates, signals pause — Dow tops 13,000

30 04 2008

Fed cuts rates, signals pause — Dow tops 13,000

Posted by: in Housing

Filed under: Economic data, Headline news, Housing, Federal Reserve, Recession

Not at all surprising, the Federal Reserve has announced it cut its benchmark federal funds rate by a quarter percentage point, to 2%. Further, it also signaled it would pause the recent policy of rate cuts as it removed some language that was previously present in the statements regarding downside risks to economic growth.

Despite the move being fully expected, especially after today’s GDP report showed the economy hasn’t contracted and that inflationary pressures weren’t as high as presumed, the stock market reacted positively and Dow Jones Industrial Average topped 13,000 for the first time since January. Superior than expected results from General Motors (NYSE: GM) and Procter & Gamble (NYSE: PG) also added to the positive sentiment.

While the Fed slowing the pace of its rate cuts, if not pausing them altogether, might usually be considered as negative for stocks, it seems investors took the positive news that the economy might need less bolstering more into consideration this time. Sure, the housing sector, the credit crunch, consumer spending and the labor market were noted by the Fed as weak, under stress or requiring help, but the statement also mentioned that the easing policy to date “should help to promote moderate growth over time.” And that is what the market may be reacting to mostly.

As we’ve seen the last few weeks, the market has been on a steady upward trend. Being forward looking, if investors believe the measure taken by the Fed so far and in the future will succeed, we might yet see this trend continue.

Update 3:25 PM: The initial reaction to the news has reversed its course by now and the Dow, which has topped 13,000 briefly earlier is now up only 27 points. The Nasdaq composite and the S&P 500, which have originally joined the initial rally are now in the red. Perhaps the uncertain pause isn’t being accepted as well after all, especially with more and more economists warning the economy is still in a bad shape, inflationary pressures still high and that all that could definitely affect corporate profits.