Tuesday, December 11, 2007

Market Drops on Fed Rate Cut Announcement

The Federal Reserve cut its federal funds rate by one-quarter of a percentage point today, trying to keep the country out of recession. Wall Street had hoped for a more aggressive cut, and traders reacted to the news by sending the Dow Jones industrial average down almost 200 points within minutes of the announcement.

The reduction in the federal funds rate to 4.25 percent marked the third rate cut in the past three months. Fed officials signaled that further cuts were possible if a severe downturn in housing and a crisis in mortgage lending get worse, the Associated Press reports.

Commercial banks were expected to quickly match the latest reduction by trimming their prime lending rate, which would reduce this benchmark rate for millions of consumer and business loans to 7.25 percent.

The Fed started cutting rates in September with a bolder-than-expected half-point move and then reduced the funds rate by a quarter-point at its Oct. 31 meeting. The central bank was trying to make sure that a severe slump in housing, spreading mortgage defaults and financial market turbulence which hit with force in August did not derail the economy.

Source: NJ.com

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