Fed interest-rate cuts

In a gloomy market, where the headlines have been dominated by crisis and interest-rate cuts, a lot of consumers have figured that they would at least get some payback when the rate cuts hit home.

For that to happen, however, consumers are going to have to work for it and make some moves that they might not have been expecting.

But what the rate situation is making plain is that for any consumer carrying debt and nervous about the stock market and inflation the best way to increase net worth is likely to come from refinancing and paying off debt.

That said, it won't be mortgages that lead the way in refinancing. Mortgage rates tend to be tied more to Treasury yields than to the short-term rates that the Federal Reserve is cutting, so while consumers may expect a Fed cut to help them out at home, there's no guarantee.

In general, long-term rates like mortgages move in sync with short-term rates because the cuts are being made in order to help a slowing economy; what makes today's situation different is that the cuts are being made to stem a financial crisis that occurred without a recession. Lacking that downward stimulus, longer-term rates have not followed the short-term made-to-bail-out-the-market-now trend.

The only plus for consumers is that rates on adjustable-rate mortgages have dropped, so that the mortgage resets that were expected to crush consumers -- as debts they took on a few years back were repriced to much higher levels -- have actually not been such a big burden. In some cases, the reset rate has actually been better than the introductory rate.

"This has helped people who got into trouble with ARMs," says Greg McBride, senior financial analyst for BankRate.com, "but for almost every other consumer, this news hasn't been so good."

The one sure outcome of a Fed rate cut is that savings rates are going down. For savers, that has dropped rates on certificates of deposit and money-market accounts back towards the record lows they didn't expect to see for awhile. The average one-year CD is now paying 2.89%, down from just over 3% a week ago and likely to fall further before stabilizing.

"Savers are watching two things happen right before their eyes," McBride says. "First, they are seeing savings rates go back to levels where they have to wonder if it's worth it, and they are watching each rate cut fuel inflation, which makes it harder for their savings to keep pace with inflation."

In fact, most savings vehicles currently lag inflation, meaning that the nervous investor who wants to find a safe haven to avoid principle risk in the stock market is, in fact, embracing purchasing-power risk -- the chance that their money will lag inflation -- if they move money into savings vehicles.

Dow, S&P 500 drop,Nasdaq up

The Dow and the S&P 500 dropped on Friday as concerns about the outlook of bond insurers weighed on financial shares, but bargain hunting in the technology sector pulled the Nasdaq into positive territory.

Shares of JPMorgan Chase & Co (NYSE:JPM - News) dropped 1.7 percent, and led the Dow's losers, while credit card and travel services company American Express Co (NYSE:AXP - News) slid 2 percent.

The drag from financial shares was driven in part by investor unease about the outlook for bond insurers after Moody's Investors Services cut its "AAA" ratings for bond insurer XL Capital Assurance, a unit of Security Capital Assurance (NYSE:SCA - News).
Comments from a Federal Reserve official saying a recession might not be avoidable were another headwind for stocks.

The Dow Jones industrial average (DJI:^DJI - News) was down 67.06 points, or 0.55 percent, at 12,179.94. The Standard & Poor's 500 Index (^SPX - News) was down 6.00 points, or 0.45 percent, at 1,330.91. The Nasdaq Composite Index (Nasdaq:^IXIC - News) was up 3.59 points, or 0.16 percent, at 2,296.62.

Investors fear that downgrades of bond insurers could further harm the banking sector and stunt the global economy as financial institutions take a hit from subsequent write-downs of their assets.

JPMorgan shares fell to $44.23 on the New York Stock Exchange, while shares of American Express dropped to $45.55.

Shares of MBIA Inc (NYSE:MBI - News), the world's largest bond insurer, slipped by 0.4 percent to $14.12.

The company on Thursday sold $1 billion of shares to raise capital it hopes will help it avoid a rating downgrade. The sale was at a discount to MBIA's closing price.

On the Nasdaq, Apple Inc (NasdaqGS:AAPL - News) provided the biggest lift to the index, with a gain of 1.7 percent to $123.24. Tech stocks recently have taken a beating as investors worried about business spending, making some stocks attractively priced.
as attractive valuations lured investors to seek bargains.

San Francisco Federal Reserve Bank President Janet Yellen, speaking in Honolulu, indicated on Thursday a willingness to cut U.S. interest rates further, but she said she was not confident a recession can be avoided this year.

Fed May Cut Rates Again Today

Federal Reserve Is Expected to Cut a Key Interest Rate for a 5th Time

The Federal Reserve is likely to follow its bold action last week to battle an economic downturn with further interest rate reductions, although analysts are split on just what size the future cuts will be.

Some believe the Fed will settle into a series of quarter-point moves, especially if upcoming economic reports show the economy is slowing but not toppling into an actual recession.

That would mean the Fed will cut its federal funds rate, the interest that banks charge each other, by a quarter point at the conclusion of Wednesday's meeting. It would be the fifth rate cut since last September.

Last week, the Fed announced a surprise three-quarter-point cut which drove the funds rate down to 3.5 percent. It was the largest reduction in this rate in more than two decades and the first change in the funds rate between meetings since the immediate aftermath of the September 2001 terrorist attacks.

Federal Reserve Chairman Ben Bernanke and his colleagues held an emergency videoconference call on Jan. 21 after a turbulent day on world markets when investors grew increasingly worried about what a recession in the United States would do to the prospects for global growth.

Many analysts believed the Fed would quickly follow last week's aggressive move with a cut of at least a half-point at its first regular meeting of the new year. That view gained support on Wednesday hours before the Fed announcement, when the government reported that the total economy slowed to a barely discernible 0.6 percent growth rate in the final three months of last year.

The increase in the gross domestic product was just half what had been expected and some economists believe that the GDP could tumble into negative territory in the current quarter. One definition of a recession is two consecutive quarters of negative GDP.

However, other economists said they were still looking for just a quarter-point move by the Fed because other reports show the economy appears to be skirting a full-blown recession.

In the category of positive reports was news Tuesday that orders to U.S. factories for big-ticket durable goods jumped 5.2 percent in December, the biggest increase in five months, and demand in a key series that tracks business investment shot up at the fastest pace since last March.

The House, worried about the possibility of a downturn, overwhelmingly approved a $146 billion economic stimulus bill on Tuesday. Passage in the Senate could be slowed by an effort to expand the measure.

Whatever the Fed does Thursday, analysts said that further rate cuts are likely until the central bank is sure that the economy is back on sound footing. Bernanke pledged in a speech on Jan. 10 to take decisive action to combat a slowdown. Many economists believe the funds rate could fall to 2.5 percent before the Fed stops easing.

"It is clear that the Fed has moved into a crisis-fighting posture," said David Jones, chief economist at DMJ Advisors.

Stocks Drop, Then Rebound, After Rate Cut -- but Long-Term Recovery Could Be More Difficult Tuesday January 22, 6:23 pm ET

The opening bell hadn't even sounded on Wall Street when the Federal Reserve announced an emergency interest-rate cut. The Dow Jones industrial average fell 465 points -- including 300 in the first minute -- then rebounded to finish down a more bearable 128

The recovery Tuesday was a victory of sorts for a battered market. But a long-term comeback may depend on factors much more difficult to achieve -- a turnaround in the housing market and renewed confidence among U.S. consumers, who hold up most of the economy.

The alarming early drop in U.S. stocks followed the lead of markets abroad, where investors fled stocks and sent indexes plummeting on fears of a U.S. recession that could spread to other global economies.

By the close, the Dow had recovered to a loss of 128.11, or just over 1 percent, at 11,971.19.
Before trading began, the Federal Reserve moved to slash its benchmark federal funds rate by 0.75 percentage points, to 3.5 percent. It was the widest cut since 1990, the beginning of what the Fed says is a comparable period in the way it handled the rate.

The Fed cut the discount rate, the interest rate the Fed charges banks directly, to 4 percent, also a three-quarter-point cut.

Many traders had anticipated a rate cut, but it was unusual for the Fed to make the call between regularly scheduled meetings of its policy-making Open Markets Committee.