The Fed to Take a Vacation on Interest Rates Cutting

Today, the Dow Jones closed below the 7,000 points, for the first time in 5 years.

So, until January 20, 2009, what is President Bush doing to help ease the market? Will playing the blame game with the Congress help ease the market?

According to the Press Release of October 8, 2008 by the Board of Governors of the Federal Reserve System, the Federal Open Market Committee has decided to lower its target for the federal funds rate 50 basis points to 1.5 percent. The Committee took this action in light of evidence pointing to a weakening of economic activity and a reduction in inflationary pressures.

However, just a few weeks later, because of the collapse of some of the US financial institutions, on October 29; “the Fed further cut the interest rates to 1%, hoping to offset the sharp recent tightening in credit conditions that threatens to plunge a weakening US economy into a recession”.

The Press Release further states that the Fed Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

Looking back, on May 16, 2000, the interest rates was at its peak high at 6.50%, only lower than the July 13, 1990, when it was at 8.00%, but since 2000, the Fed has been on a rampage, cutting down the interest rates, hoping to leverage the market.

As the Fed meets on December 16, 2008, I expect them to leave the interest rates at its current rate, 1%, but as the market starts to absorb the recently passed bailout money, I expect the Fed to again leave the interest rate at its current rate when they meet again on January 27-28, 2009.

As Obama settles in, and the financial market starts to stabilize as a direct result of the bailout rescue and the reassurance by the new Administration, when the Fed meets again on March 17, 2009, I expect them to raise the interest rate by a quarter of a point to 1.25%, in order to balance out the ripple effect of the bailout system.

However, as of today, at 3:30 pm, the major indices fall to session lows as financials (-8.9%) get clipped. The S&P 500, at 823.98, the NASDAQ at 1418.63, and the Dow at 8166.85, are poised to close at their lowest levels since 2003. The S&P 500 is only a few points above its 5-year intraday low of 818.69.

Thus the question remains, that between now and “then”, can we able to survive this financial turmoil, and what this all means for your wallet or business?


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