Wednesday, 12 December 2007

Fed cuts rates, stocks dive

The Federal Reserve cut its target for the federal funds rate 25 basis points to 4.25 percent yesterday. Investors weren't impressed, according to Reuters.

U.S. stocks sank on Tuesday after the Federal Reserve trimmed interest rates rather than slashing them, letting down investors who fear the economy might slip into recession unless the central bank becomes more aggressive...

Many traders were expecting a 50-basis-point cut, said Tim Biggam, lead option strategist at online brokerage thinkorswim, in Chicago.

"In addition, the Fed's outlook did not present a slam dunk case for a further rate cut, which led many traders to trim their long positions in stocks," Biggam said.

The Dow Jones industrial average slid 294.26 points, or 2.14 percent, to end at 13,432.77. The Standard & Poor's 500 Index dropped 38.31 points, or 2.53 percent, to 1,477.65. The Nasdaq Composite Index lost 66.60 points, or 2.45 percent, to 2,652.35...

"People realize it's tough out there. They were looking for the Fed to 'quote unquote, come to the rescue' and now I think you're seeing the negative knee-jerk reaction on the quarter point cut," said Scot Ciccarelli, retail analyst at RBC Capital Markets.

In other words, there may have been a bit of wishful thinking out there.

To put things in perspective, after yesterday's fall, the S&P 500 is still down only 6 percent from its October high and still up 4 percent for the year. That's not bad heading towards what could be a pretty tough period for the US economy.

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