The impact of the Fed policy

The Federal Reserve, which is the central bank of the US, has decided to cut once again its interest rates. Although this decrease was anticipated by most of the economists, there was a surprise regarding the extent of this decrease. In fact market thought the Fed would slash interest rates by a half of a point, whereas it has been only a quarter of a point. In the end US interest rates are now at the level of 4.5%.

• What is the aim of this policy?
  

Housing crisis and subprime meltdown have strongly damaged the mood of the market. Every week, another company announces terrible results with huge losses. And we do not know yet the extent of this crisis. In order to avoid a recession, the Fed has decided to slash its interest rates in order to improve the market confidance, avoid a recession, and boost the growth of the economy.

• Is this decrease a trend?

There is no consensus regarding the policy of the Fed. Economists ignore whether this decrease is only a short-run policy, or whether it is long-term trend. However most of specialists believe it might be the last cut until 2008, if at all.

• What is the impact on the bond market?

The immediate impact on bond market is positive. In fact this cut is a good opportunity to purchase bonds in the second market.

• What is the impact on the stock market?

Stock market is strongly related to the Fed policy. When interest rates go up, it becomes less attractive to invest in shares, as cost of opportunity is higher. On the other hand, when interest rates go down, it becomes more profitable to invest in shares, which is the case now. Consequently stock market will benefit from the policy of the Fed.