Federal Reserve Aggressively Cuts Rate!

Fed hopes bold cut eases global fears
Bank's rate strategy has wide-ranging effects

The Federal Reserve handed Wall Street a Valium on Tuesday, in the form of one of the largest interest-rate cuts in recent memory.

Investors, consumers and companies have become increasingly white-knuckle anxious about a global recession.

That fueled a sell-off in foreign stock markets on Monday, which spilled over into the U.S. and prompted the surprise rate cut.

Here's what you need to know:

What does the Fed move mean?

The central bank cut two benchmark interest rates by 0.75 percentage point each.

Those moves will lower borrowing costs on various consumer and business loans, and are intended to stimulate the economy over the balance of the year.

"Hopefully, it will help out lenders, make homes more affordable and stabilize housing prices," said Brent McQuiston, a vice president at WealthTrust Arizona in Scottsdale.

Consumers will see the biggest impact on home-equity lines of credit, variable-rate credit cards and adjustable-rate mortgages that were set for a pending rate adjustment, said Greg McBride, senior financial analyst for Bankrate.com in North Palm Beach, Fla.

"The cumulative impact of the Fed's actions will provide meaningful relief," he said.

Consumers with good credit will have opportunities to refinance or take out new loans at lower rates.

"Fixed-rate mortgages are at their lowest levels since July 2005," said McBride, noting that the new average rate for a 30-year conforming loan is 5.6 percent.

Is there a downside to Fed rate cuts?

"The good news is loan rates will go down," said Deborah Bateman, an executive vice president at National Bank of Arizona in Phoenix, AZ. "The bad news is the interest paid on CDs and money-market accounts will go down, too."

Does the Fed's action mean a recession is inevitable?

Not necessarily. Recessions typically are defined by two-plus quarters of a contracting economy.
By that measure, the earliest recession announcement won't come before late spring, if at all. In fact, the Fed reiterated that it expects the economy to avoid recession.

Still, there have been worrisome signals lately.

Along with the housing slump and bank write-offs, the job market has weakened and manufacturing output has slipped. Even if the economy isn't in a recession, the pace of growth is so slow that it feels like one to many people.

Will the rate cuts make banks more willing to lend money? That's hard to say.

"Large money-center banks have virtually frozen their balance sheets, reluctant to lend even to good credit (customers)," said Scott Anderson, a senior economist at Wells Fargo.

Even after the Fed's move, the availability of credit will vary from bank to bank. Institutions with high exposure to subprime mortgages or developer loans might not be in a position to offer many new loans, Bateman said, but others will be seeking to extend credit.

Are we now in a bear market? Not yet, although the U.S. market is getting close.

The Standard & Poor's 500 index, for example, is down about 11 percent in January alone, and 16 percent since the slide began in October. Bear markets are usually defined as drops of 20 percent or more.

But the recent downtrend doesn't necessarily mean things will get much worse from here, even if the economy limps along for a while. Bear markets typically end with a bang, not a whimper. The heavy selling of recent weeks could be a sign that the bottom is closer than the top.

What should investors do? There's no set answer, but investors would be wise to think twice before bailing out now.

Periods of sharp swings also are good times to assess your comfort level with your stock holdings and overall portfolio.

"If you have a financial plan that's right for your risk tolerance, stick to it and don't panic," McQuiston said. "Trying to call the bottom is a dangerous game."
Russ Wiles, The Arizona Republic, Jan. 23, 2008
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