Economy on the edge by Claudia Sonea

On Tuesday it took place the fourth rate cut for the Fed since mid-September, when it first cut interest rates from 5.25% and it is the result of the unemployment rate that increased a lot (in December from 4.7 % to 5 %), of a decline in factory activity and in consumers spending (retailers complained about a poor holiday season), and especially of the sluggish mortgage market. It is for the first time since Sept. 17, 2001, the day stock markets reopened after the 9/11 terrorist attacks, the Fed cuts interest rates outside its regular meeting schedule. The policymakers met via video conference Monday evening and took the decision that was not unanimous and met strong opposition from St. Louis Fed President William Poole. In spite of the fact that it's the biggest cut in 18 years, there is no guarantee of solving the economy's issues and for savers means lower returns on their money. Furthermore, as a consequence of the cut, there has been a plunge in financial markets around the world, as foreign investors expressed alarm about a possible recession. From the statement of Fed Chairman Ben Bernanke and his colleagues many financial analysts concluded that they do not exclude the possibility of another rate cut that could be decided as early as next week, when Fed policymakers are scheduled to gather in Washington. After Fed's announcement, lenders cut the prime rate for their best customers by three-quarters of a percentage point to 6.5% and that underlines the entire purpose of the cut: to encourage financial institutions to keep lending money to businesses and consumers, rather than fuel an economic downturn by limiting credit. Due to the rate cut, there will be greater availability of credit to consumers and businesses, especially after the decline in available credit for some types of lending. On the other hand banks that had huge losses might ignore the break given and be cautious about extending credits, according to Mark Zandi, chief economist at Moody's Economy.com. By facilitating the lending, Fed gave a boost to consumer spending, which accounts for more than two-thirds of U.S. economic activity, and also to businesses that can fund investments as well as their day-to-day operations, including paying their workers. Nevertheless, the rate cut also means that they fear the recession and they see it like something most probably to happen, according to Vincent Reinhart, former director of the Fed's division of Monetary Affairs who is now at the American Enterprise Institute. The last recession was in 2001 (March-November), but it was the shortest of the US history. Getting back to what really interests you, the rate cut affects the consumer by loosening the mortgage market (equity loans fall from 7.74% at the first of the year to 7%, while fixed mortgages had fallen to 5.87% last week from 6.07% the first week of January), the credit cards' rates (a drop to 13.1% from 14% in September), and also lower rates on auto loans that in the next few weeks can be accompanied by special-financing deals (that will not be available for borrowers with poor credit). A good portfolio would be: 40% bonds and 60% stocks if you are looking for a long-term investment like retirement. The economy has finally got into Bush's attention who managed to squeeze in his agenda a speech about the economy and how to maintain calm and try to cooperate in order to restore order. What will happen next? Stay connected and you will find out.

related story: http://www.usatoday.com/money/economy/2008-01-22-fed-cut_N.htm?csp=1

by Claudia Sonea for PocketNews (http://pocketnews.tv)

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