U.S. Fed cuts key lending rate, markets bounce back

The U.S. Federal Reserve took aggressive action Tuesday to counter a credit crisis that's leading to fears of a recession. It announced that it will cut its key lending rate by three-quarters of a point, bringing it to 2.25 per cent, the lowest it's been in more than three years.

The announcement -- along with a better-than-expected earnings reports from big brokerage firms Goldman Sachs and Lehman Brothers -- gave a big boost to U.S. and Canadian markets Tuesday. The Dow Jones Industrial Average closed up by 420 points -- and the Nasdaq was up 91 points.

The Toronto S&P/TSX closed ahead 184.55 points to 13,136.7. The TSX had closed down about 300 points Monday at 12,952.15. Despite some good news, analysts are still concerned about the long-term economic outlook.

"While there was a relief rally with Goldman and Lehman, the fundamentals are still that these companies had a very sharp decline in profitability. It just wasn't as bad as analysts originally had expected," said Fred Pynn, president and CIO of Bissett Investment Management in Calgary.

The Fed was also cautious earlier in the day about the overall economic picture.

"Today's policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity," the Fed said in a statement issued Tuesday.

"However, downside risks to growth remain. The committee will act in a timely manner as needed to promote sustainable economic growth and price stability."

Some investors were disappointed by the Fed's rate cut, with some hoping it would have been a full percentage point drop.

"The U.S. Federal Reserve found itself in a tight spot,'' BNN's Michael Hainsworth told CTV Newsnet late Tuesday afternoon.

"If it cut a whole percentage point that would stoke inflation. It might help the economy but in the long term do more damage than good."

Analysts said the Fed may have found itself constrained by news that core inflation for U.S. wholesale prices jumped 0.5 per cent in February, the steepest increase since November 2006.

The Bank of Canada is slated to make its own interest rate announcement next month. It's expected that new governor Mark Carney could make his own interest rate cut of 50 basis points, but some analysts say the overnight rate cut may only be a quarter of a percentage point. Canada is not facing the same inflationary pressures as the U.S.

Tuesday's move by the Fed was the latest in a series to shore up the U.S. financial system. There was an emergency cut of a quarter-point on Sunday night, and a Fed intervention in the JPMorgan Chase fire-sale purchase of Bear Stearns, an investment bank ravaged by the subprime mortgage and credit crunch crisis.

"Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters," the Fed said.

The credit crunch spurred by the subprime mortgage crisis has spread into other parts of the U.S. financial markets, and this is squeezing some financial institutions.

With files from The Associated Press

Comments are now closed for this story

Rick from Alberta
said

I am very cautious about how the US will rebound and on who's back, but am glad that Canada is fairing better.
However, I am furious that when the super rich banks get into trouble through their own greedy doing, the Canadian public has to bail them out, even though it is for a good cause (our investments ) in the end.

My question is this: Is the government of Canada now going to take the reins, when this stabilize's and make the banks cut the average citizen a break with bank fees and non-exsistant interest on our money. The Banks have been clobbering us for years and look who has their hand out now!

It's time the powers that be regognize an opportunity to help the beleigured tax payers of this country. Want to boost the economy Mr. Harper? Then put some spending money back in our pockets for a change!!

Danny
said

Goldbug - In the long run all real assets are an inflation hedge. Gold, silver, your house, art, even stocks (though in the case of stocks lower profits tend to overpower inflation and drive stock pries down in the short term.)

The Feds should intervene, but the important point is if they do the owners of the banks need to have their investments wiped out. (IE The Feds will save you, for say a mere 98% stake in the company.) That way the system is saved, but the fools who took the risks and lost all their money in the process will think twice next time.

Darren
said

Of course Bush is to blame. He's to blame for everything wrong in the complacent, lazy Western World isn't he?

Give your heads a shake people. Bush doesn't control the corrupt lenders or the stupid people that signed up for mortgages they couldn't afford.

He has been a "lame duck" President for the past 15 months.

Remember it's the pathetic Democrats that control Congress.

Someone please explain how Bush is responsible for SubPrime mortgage mayhem?

21st Century Serfdom, the Bank is your Master!
said

Every action has an equal and opposite reaction. The market is getting it's "Sugar Fix" of short term energy from the FED. They can't keep this up forever and when they have to finally stop. There will be nothing left. The US consumer is buried in debt, the Canadian consumer is buried in debt. Both have grossly overpaid for their houses over the last few years, both will eventually get so overloaded, the bottom will fall out.

Economies work when consumers have no or very little debt. They don't work when most of the money they are earning is going to service their debt!

Perry
said

Gerald, you mentioned that Jim Cramer said Bear Stearns was strong? What he actually said was if you banked with Bear, you were ok. He said that the stock was worthless, even at 36 dollars the other day. The Fed bailed out all those who banked with Bear, not the investors. Big difference.

GoldBug
said

In times like these, there is only one smart play: Take your cash and trade it in for GOLD. Gold is very CHEAP right now and is only going UP UP UP! Save your money in a bar of GOLD before the FED inflates the dollar and steals away your savings.

freedom lover
said

The market "rally" is just the privileged class grabbing the free money socialist US government is printing like crazy.

Non Investor
said

If this triggers a high inflation and the poor cry out loud, will the Federal Reserve take prompt actions?

Lance
said

Let me rub my crystal ball and see the future,.....

Ah yes!!!! The US goes into a depression and drags us with it, so they beg Canada to merge their economies to create a new NORTH AMERICAN UNION with the new currency called the AMERO.

FreakAlert
said

Rick,

Good point. Nobody hasn't mentioned yet about the $750 trillion dollar derivative aspect to this

sailordave
said

This may be heartless to say, but it would be better if the feds stayed out of this mess. Once again the US gov and the fed bank have to come to the rescue. Are the banks involved beig held accountable, no. They issued loans to people who could not afford them and they knew this, if they didn't then they are incompetent. What incentive to the banks have to act responsibly when they know that the government and the fed reserve will be there to bail them out. Let'em hang.

Rick
said

If you think the US is having economic problems now, you aint seen nothin yet!
They can (and likely will) cut rates right down to zero and it will not help. The sub prime woes you've seen lately are nothing compared to the derivative disaster looming on the horizon. You will see a USDX of 55 or lower before this is all over. (Just my opinion.) Good Luck to all.

Davd Dunlop
said

Let's hope this works for where the US economy goes, Canada's has traditionally followed.

Robinhood
said

The Fed is between a rock and a hard place for sure! With inflation there the interest rate is now effectively in the negative and the bank BODs - who's members should be investigated for this mess - are responding like a bunch of greedy morons allowing the spreads to grow despite the cuts!

Btw: seems the traders on the TSX are being timid today... what oil prices - the only thing that seems to count with these people now - isn't high enough yet??!

bman
said

Hard to have sympathy for the Americans when this is a problem of their own making. SubPrime mortgages were a sure fire road to hell and they're walking down it. And to think they voted G Dubya back in - I just hope the Democrats can clean some of this mess up when they get elected. Not going to be soon enough.

freedom lover
said

Count on the so-called "conservative" Bush (big-borrower, big-spender) government to bail out Wall Street but make Main Street pay for the free fall market.

Socialism for the rich is the US way.

mac
said

US should try eliminating its half-trillion dollar deficit and its nine-trillion dollar debt.

Showing some fiscal responsibility would inspire confidence.

But the Bush Administration is hooked on borrow-and-spend irresponsibility.

Robin the Hood
said

Looks like the US Fed is leading the US into a Japan style decades long recession, and with stagflation. Maybe its time that Canada's business community finally gets off their arse and try to diversify their customer base!

PBW
said

And all this because supposedly competent managers have to make profits grow every year in order top satisfy their boards and shareholders. It seems to me that there are times when even maintaining the same level of profit is dangerous. The moment you add questionable methods to the mix is the moment you get much higher risk. But such risk runs boths ways: to higher profits, or in the case of Bear Stearns - and potentially other houses - high losses.

And which highly educated fool proposed sub-prime mortgages in the first place?

Michele
said

Anthony, and Bush doesn't want to 'over correct'...?

Jeremy
said

I like Anthony's final comment...and President Bush doesn't think things "are that bad". Bush is a moron. He is insulting the Americans too much by saying that.
Things are bad are going to stay that way for a while. Cut rates all you want but every action has a reaction...and not always positive.

Michael
said

If you look back through history, markets go up and markets go down. The important thing to remember is that in the long run, they go up. For those with a long term horizon in mind, now is a great time to buy as everything is at rock bottom prices. That is, there are some great deals out there. Think of when you go to the store to buy something, you always look for the best deal. This is the same, there are some good deals for those who have the time for markets to recover. This is how some of the best managers make their money.

Anthony
said

..32-billion of commercial paper has put the investments into bankruptcy protection..Fate of Bear Stearns Maple bonds uncertain..CIBC stock falls after loss at bond insurer...the fall out from sub-prime
mortgages continues -when will the U.S. Federal Reserve be forced to slash its key lending rate to a negative number and would even that help ??
And president George W. Bush thinks that things are really " not that bad"..

Gerald Skowronski
said

It's not called the free fall market for nothing. Seriously folks; just let this market of cards fall into place and all will be right with the world. Some days you eat the Bear Stearns and some days the Bear Stearns eats you. It's all in a day's work. That business analyst guy Cramer on TV must feel like a dolt after telling viewers that Bear Stearns was strong. So much for being an expert.

Shamaro
said

The word Panic right now in the market place is the buzz word. There still will not be light at the end of the tunnel for a long time to come and saying that the US economy will start expanding again by late 2008 is a very optimistic comment. The US will recover eventually, but it will take in the neighbourhood of about another year and a half before there is actual light at the end of the tunnel. The only light at the end of the tunnel right now, is a Huge Freight Train barrelling right down at the US economy. Maybe now would be a good time to get our money and stuff it into our mattress.