What rate cuts mean
Wall Street had a great day today as investors expected another huge cash infusion into the US Markets. The Dow was up 1.45% as traders think that the Federal Reserve will cut rates again, infuse more money to the economy and send money rolling through the stock markets.
What people don’t know is that the Federal Reserve has been adding money like crazy, 60 Billion new dollars were printed in January 2008 and sold to the highest bidder. These cash boosts have been in full swing for the last few months, adding to the mounting credit problem.
The market movements reflect a common belief that Ben Bernanke will cut rates by half a point on the next meeting. Last week, Bernanke cut rates by three-fourths of a point after the global market meltdown. Many worldwide indices suffered from a 5-7% loss in one day alone, India faired the worst, down almost 11% before the markets were closed to cut losses.
FED rate cuts are historically good for falling markets especially homebuilders and realtors. Lower rates prompt people to buy homes. Businesses with high corporate debt also benefit from low rates as the rate cuts are often priced into the bond markets.
Aside from further rate cuts, Bernanke is pushing Congress for a $145Billion dollar tax refund for individuals and businesses. This is quick money for the economy but a black mark for future generations. The $145Billion will just go down as more government debt as the money has to come from somewhere.
If rates are slashed look to see a big recovery in the financial sector which always sees a benefit in lower rates. Lower rates traditionally bring lower defaults with the same amount of income per loan. Easy credit also means more borrowing.
The markets should respond well to a half-point cut tomorrow. A half-point is already priced into today’s price so anything less will bring to sell off tomorrow. For a quick buck, look to homebuilders for a quick return from the FED rate decision.
