Last 25 basis points cut for 2007 amid soaring oil price

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Nov 01 2007
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As expected the Federal Reserve executed the second rate reduction by one-quarter percentage point or 25 basis points to 4.50 percent on Wednesday. Ben Bernanke has cut 50 basis points from 5.25% to 4.75% earlier in September. The 9-1 decision to cut rates on Wednesday was opposed by Thomas Hoenig, president of the Federal Reserve Bank of Kansas City. He preferred no change in the funds rate.

“The pace of economic expansion will likely slow in the near term, partly reflecting the intensification of the housing correction,” the Fed acknowledged in a statement explaining its action. In response to the latest cut, commercial banks including Bank of America, Wells Fargo and KeyCorp. announced that they were cutting their prime lending rate – for certain credit cards, home equity lines of credit and other loans – by a corresponding amount, to 7.50 percent.
Bernanke cut 25 basis pointsFed policymakers indicated the two rate cuts ordered so far may be sufficient to help the economy make its way safely through the trouble spots. They said the risks to the economy from inflation “roughly balance,” or are equal to, the risks of a serious downturn in economic growth. Previously, the risks of a recession were seen as more of a threat to the country’s economic health.
Lynn Reaser, chief economist at Bank of America’s Investment Strategies Group and other economists think the Fed probably will leave the funds rate alone when its meets next on Dec. 11, the last session of the year. While the stocks cheer the announcement, the oil prices soared to a record $95 a barrel. This put pressure on Bernanke as increases in energy and commodity prices have put renewed upward pressure on inflation.
Dow Jones 31 Oct 2007The Dow, which had dipped briefly into negative territory after the decision, rose 137.54, or 1 percent, to 13,930.01. The Standard & Poor’s 500 index rose 18.36, or 1.20 percent, to 1,549.38, and the Nasdaq composite index rose 42.41, or 1.51 percent, to 2,859.12. The Russell 2000 index of smaller companies rose 11.87, or 1.45 percent, to 828.02.
Now that the interest rate has been reduced the gap has widen between U.S. and Malaysian. It would be interesting to see if the Malaysian Central Bank will be under pressure to cut the rate as well. If it plans to have stronger ringgit, then the governor does not have to do anything – just sit tight. However this would invite speculators and to intervene means the central bank have to buy dollars. Would it be more efficient to reduce rate then? Furthermore the inflation is going up regardless of the rate due to poor economic management.
On the side note, I blogger earlier how the Google amazingly leaps to $700 from $600 within 20-days of trading and I can assure you that this might not happen again anytime soon within your lifetime. The stock is just spectacular. It’s fabulous. For readers who have been following my journey to the Googleplex, my position has breached the 400 percent profit. However it weren’t with fear and greed along the way especially when you saw how the stock was trying very very hard to stay above the $700 level but slipped on various occasions.
GOOG chart 31Oct2007AAPL chart 31Oct2007Frankly there was a period on Wednesday trading when I thought of just sell and close the position as the heat was too much. But then the expectation was high that the Feds was going to cut the rate and this will send the stocks higher. So what I did to control my emotion? I closed all my trading session and did some other stuff. And when I checked the Google Inc. (as well as Apple Inc.) after the closing bell, I was smiling from left to right. Now I’ve told you how I did it, you might want to tell me how you control your emotion when you’re trading volatile stocks.
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