This article from USA Today has a recap of the move that The Fed made overnight and the plunge that the Dow Jones made this morning at the opening of trading.
Okay, let’s take this one step at a time. First, The Fed cuts the federal funds rate .75%, going from 4.25% to 3.5%. The federal funds rate is basically the short-term loan rate that is a guide for banks who borrow from other banks to keep their reserves in line with federal regulations. This rate cut does help promote economic growth and investors are attracted to it, but it DOES NOT affect the mortgage interest rates much. So, don’t go shopping for mortgages today, if that was your assumption. The question is not what this does for the economy, the question is that why would The Fed cut this rate so drastically at an unannounced time. Usually they only lower or higher rates at their scheduled meetings. This means that The Fed is concerned about us going into a recession. We’ve heard about it for months, and I would not accept that it’s happening, but they must know something that we don’t know. I think they got scared when they saw international investors start selling off U.S. stocks, because apparently, the rest of the world has been listening to our news stations as well. The economy grew 4.8% in 2007, as compared to 5.2% in 2006, and 5.4% in 2005. There has been a slip, but I think that we can contribute much of that to the slump in the housing market. We all knew it was coming. A 3/2 house in west palm beach, Florida was coming for $450,000 and $750,000 in California. Sorry, but the middle-class can’t afford that! I’m still going to be optimistic about our economy. I am a realist, but I won’t succumb to the doom and gloom that the media wants to feed us about a potential recession.
The Dow plunged this morning, but after you read all of the articles, go look at the current numbers, because the last time I checked, it had stabilized quite a bit. The rate cut should help the market to trade better than last week, but we can’t control what the world thinks of us. Their information is limited, and they will duck out at the least bit of a sign that we’re not doing well.
Questions to think about: Is The Fed pandering to investors? Should they keep slashing rates like this for a quick fix? Is The Fed too late to make changes that will avoid a recession? If we do go into recession, how will it affect you? I’ll try to research these questions and come up with some answers in the near future. For now, keep doing what you are doing. Keep saving vigorously, spending wisely, and furthering your career path. If you do those things, what the stock market does will never rule your life.