Fed Gives The People What They Want

Wall Street got what it was looking for Wednesday afternoon, as the Federal Reserve announced a half-percentage-point reduction in key interest rates in an effort to aid a faltering U.S. economy.

After Wednesday's move, which was widely expected after the central bank took rates down by 75 basis points in a rare inter-meeting cut on Jan. 22, the Fed has now cut its federal funds target five times since first taking up the ax on Sept. 18. As a result of the Fed's easing, the federal funds overnight interbank loan rate has been taken down to 3.0% from 5.25%. Each cut has been matched by an equal cut to the discount rate, which now stands at 3.5%. (See: "Fed On Easing Street")

The Fed's statement revealed a 9-1 vote to cut rates, and said financial markets still remain under considerable strain.

The rate cuts have been prompted by an effort to stave off a recession in the face of the of the subprime mortgage meltdown, which has crippled the housing market and infected nearly every segment of the U.S. economy, threatening to slow or even completely halt growth.

Expectations of a cut from the Fed had grown earlier in the day, after the U.S. Commerce Department's preliminary report for the fourth-quarter showed a slowdown in gross domestic product growth to 0.6%. The advance reading was half Wall Street's estimate, and a far cry from the 4.9% GDP growth of the third quarter. Recession fears were stoked by the report, ratcheting up the volume of those calling for a hefty cut from the Fed. (See: "U.S. Jobs Solid, GDP Not So Much")

Still, the Fed's moves have not been without their consequences. A feeble U.S dollar continues to fall against most foreign currencies, and fears of inflation remain prominent as commodity prices soar.

Crude oil was at $91.72 a barrel, up 8 cents, leading into the Fed's move.

Treasury yields edged higher prior to the statement from the central bank, with the yield on the two-year note rising to 2.31% from 2.28% late on Tuesday, and the benchmark 10-year note climbing to 3.70% from 3.66%.

Investors largely remained on the sidelines prior to the Fed announcement, as the major averages treaded water with modest losses.

The immediate knee-jerk reaction following the Fed's announcement saw the major averages jump, pushing the Dow Jones industrial average from 40 points down to a 70-point gain for the day, up 0.6%, to 12,557. The Standard & Poor's 500 and Nasdaq made similar moves, with the S&P up 9 points, or 0.7%, to 1,371, and the Nasdaq up 11 points, or 0.5%, to 2,369 on the news.

The subprime meltdown and housing crisis are two of the primary factors that sparked the slowdown in U.S. economic growth, and more hits may be on the way.

Financial stocks were swayed by a fresh round of subprime fears after Swiss bank UBS (nyse: UBS - news - people ) warned its fourth-quarter loss will be worse than expected and it will take a $14 billion write-down related to mortgage losses. The news sparked a 2% decline in UBS shares and also pressured other financial stocks, which were mixed leading into the Fed's announcement.

Dow components Citigroup (nyse: C - news - people ) and JPMorgan Chase (nyse: JPM - news - people ) had pared earlier losses but remained in negative territory. The major brokers were mixed as Bear Stearns (nyse: BSC - news - people ) saw a 3% decline while Goldman Sachs (nyse: GS - news - people ) added 1%.

In earnings news, Yahoo (nasdaq: YHOO - news - people ) continued to stumble despite a fourth-quarter report that topped expectations. The search engine company reported that 2008 revenue may fall short of expectations, sending shares down 8.7%. (See: "Economic Bust Poses Bigger Threat To Yahoo")

© 2008