Global stocks surged early Wednesday after a rally on Wall Street, which was sparked by an unexpectedly sharp interest-rate cut by the Federal Reserve. The Dow Jones industrials skyrocketed to close 2.5 percent higher on the news that the Fed would slash short-term interest rates by a half percent -- the first cut in four years.
The central bank’s policymakers said in their closely watched statement that the move was necessary to keep the housing slump and the credit crunch from dragging down the broader economy. The Fed said inflation remained a concern, suggesting that it might not cut rates further out of the fear that cheaper money might stimulate the economy too much and drive up prices.
Here’s what the cut means for you, said Jane Kim and Ruth Simon in The Wall Street Journal. First, it will “lower borrowing costs” by reducing payments on home-equity lines of credit, credit cards, and some car loans. On the flip side, it will lead to “stingier savings rates.” It should also drive down rates on adjustable-rate mortgages, but there’s a catch. Fixed-rate mortgages could rise “down the road if bond markets expect the Fed move will spur higher economic growth or inflation.”
This surprisingly steep rate cut might spook foreign investors away from U.S. Treasurys, said Chris Isidore on CNNMoney.com. When it starts looking like rates are heading lower, government-issued bonds get “less attractive to foreigners,” and we need their money to “keep long-term interest rates low.” If this move does send the rates on 30-year mortgages higher, it “could make matters worse.”
There’s no questions this was a “bold” decision, said Sue Kirchhoff, John Waggoner, and Barbara Hagenbaugh in USA Today. “By cutting rates so sharply, the Fed indicated it hopes to put a floor under the plunging housing market, steady business hiring and investment, and keep the economy growing as it has for the last six years.” It also hopes to restore calm in the financial markets, which have been roiled by skyrocketing foreclosures and other symptoms of the mortgage mess.
So much for Fed Chairman Ben Bernanke’s “carefully nurtured reputation as an exceedingly cautious inflation fighter,” said Andrew Leonard on Salon.com. Bernanke has just established himself as someone who, “in the glorious tradition of his predecessor Alan Greenspan,” is willing to “jump in and save the financial markets from their own excesses.”
It’s true that it’s not the Fed’s job to rescue investors who took on too much risk, said Douglas Roberts on BloggingStocks. But dealing with “the moral hazard issue” -- here, fiddling with the markets to save people who made bad bets on bundled risky mortgages -- will have to wait. For now, “forestalling a recession” is the bigger priority, and this rate cut will come in handy in that fight.
The Fed made its usual noise about the threat of inflation, said David Bogoslaw in BusinessWeek Online. But it’s clear that “the magnitude of the credit crisis" has now "assumed centerstage."