Fed Rate Cut May Spark Rally on Wall St.
Saturday September 15, 5:40 am ET
By Joe Bel Bruno, AP Business Writer Fed Cut to Interest Rates Could
Bring Consumers Lower Borrowing Costs, Stock Rally NEW YORK (AP) -- Wall
Street players aren't the only ones with a lot riding on whether the Federal
Reserve cuts interest rates on Tuesday -- Main Street could also see some
pretty dramatic benefits. Policy makers are widely expected to decrease
short-term rates by up to one-half of one percentage point, a move big
institutional investors have been clamoring for in recent months.
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For the man on the street, a cut would lower credit card bills, make
mortgages cheaper and perhaps inject enough confidence into the stock market to
revive ailing 401(k) investments. Economists will likely debate until the
11th hour what the Fed will do when it releases its decision Tuesday afternoon.
Even those far removed from high finance are nervous about what could be the
biggest decision the Fed has made in years. "Customers have told me not to
touch their loans until the Fed meets," said Darin Hardin, owner of San
Clemente, Calif.-based Coastal Hills Mortgage Inc. "People have been assuming
for the past six months that rates will be lowered, and nobody wants to make a
move until some kind of event happens." Hardin said his business has been
slower in brokering mortgages in
California's Orange County, one of the nation's hottest real estate markets.
New calls for mortgages aren't coming in as frequently, and those looking to
switch to fixed-rate financing from adjustable have been stalling. A cut in
interest rates would immediately make fixed-rate mortgages cheaper. Homeowners
with lines of credit will pay less, and those "waiting on the fence to borrow"
will have reason to pick up the phone, he said. A whole host of other
borrowings will also become cheaper as U.S. banks follow an interest rate cut
by lowering their own prime rates. For those that qualify, loans spanning
everything from automobiles to education will be affected -- as will the amount
consumers are charged by credit cards issuers. There's also the psychological
impact a rate cut would have on the stock market, where the Dow Jones
industrial average has plunged into volatility after hitting an all-time high
in July. Traders have been cagey since then, sending the blue
chip index bouncing around with triple-digit swings. Wall Street pundits
have pinned their hopes on a rate cut to stem the choppy market conditions, and
send stocks higher. That would bring welcome relief in the short term to
individual investors whose stock portfolios have fallen in the process. "The
whole thing with the stock market is perception," said Adam Hewison, president
of ino.com, a financial Web site catering to individual investors. "We've had a
five-year expansion in stock prices, and in the history of things, that's a
long time before there's some kind of retrenchment. That has investors on
edge." While a rate cut would likely give the markets a short-term boost,
whether its effects would be long lasting remains unclear. There are still a
number of economic challenges facing individual investors, with some economists
believing that the U.S. might be heading into a recession. Though a cut might
help boost mortgages, it might do little to help the
slumping housing industry. Stocks might rally if the Fed delivers, but it
won't help some of the underlying problems behind why corporate earnings are
weakening. "As far as rate cuts, when the Fed begins changing direction,
there's a very short-run relief rally," said Tom Wilson, managing director of
institutional investments at Brinker Capital. "But you have to keep in mind
that they are cutting because there is something not right with the economy in
one way or another
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