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By Jason Simpkins
Fed policymakers – concerned the credit crunch and housing slump could take a heavy toll on economic growth – voted unanimously to cut interest rates by half a percentage point at their Sept. 18 meeting. Fed policymakers unanimously agreed to slash interest rates by one-half percentage point to 4.75 percent, calling it "the most prudent course of action," according to minutes of that meeting released yesterday (Tuesday).
The minutes also said that “given the unusual nature of the current financial shock, participants regarded the outlook for economic activity as characterized by particularly high uncertainty, with the risks to growth skewed to the downside.”
The release of the minutes of the policymaking Federal Open Market Committee (FOMC) buoyed hopes of another interest-rate reduction, and sent stock into record territory yesterday.
The Dow Jones Industrial Average soared 120.80 points, or 0.86%, to close at a record 14,164.53 – eradicating the prior record close of 14,087.55 reached Oct. 1. The Dow set a new trading high, as well, reaching 14,166.97.
The Standard & Poor’s 500 Index rose 12.57 points, or 0.81%, to close at a record 1,565.15. It eclipsed the prior record close of 1,557.59, reached last Friday, and also achieved a new trading high of 1,565.26.
The Nasdaq Composite Index climbed 16.54 points, or 0.59%, to close at 2,803.91. This marks the first time the tech-laden Nasdaq has closed above 2,800 since January 2001.
A federal employment report back in September originally stated that the U.S. economy shed 4,000 jobs in August – the first such decline in four years. That sent stocks into a careening nosedive, based on fears the U.S. market was headed for a near-certain recession. But then, last week, revised figures showed that the economy actually added 89,000 jobs in August.
Job-creation continued to climb in September, when payrolls rose by 110,000 jobs.
That news eased fears the economy would slide into a recession and cast doubt on whether the Fed policymakers would cut rates again, at their next scheduled meeting, set for Oct. 30-31.
But back during the Sept. 18 FOMC meeting – without the benefit of the revised jobs figures – there was a tremendous concern that a weaker economy could worsen the credit crunch and, in turn, “reinforce the economic slowdown.” While it was expected that the markets would stabilize over time, “participants judged that credit markets were likely to restrain economic growth in the period ahead,” the minutes went on to say.
If the Fed did not take action policymakers “saw risk that tightening credit conditions and an intensifying housing correction would lead to significant broader weakness,” not just in terms of economic growth but employment, as well.
News and Related Story Links:
- Money Morning Investment Analysis:
Super-Sized Rate Cut Spurs Super-Steep Rally; Dow Soars Nearly 336 Points.
- The Associated Press: .
- Money Morning News Analysis:
Surprisingly Dismal Jobs Report Unleashes Its Fury on the Federal Reserve and Wall St.