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Fed Comes Through; Lowers Short Term Interest Rates to 4.75%

Stock Market Responds Euphorically - Rises To 13820.19

September 23, 2007       Leave a Comment
By: Jerry Cole - Retirement, Investment

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Fed Cuts Interest Rates - Dow Up To 13820 - Everyone's Happy!

The Federal Reserve came through this week, and in no timid fashion. The Fed lowered short term interest rates by a half percentage point to 4.75%. They also cut the discount rate (the rate charged to banks to borrow directly from the Federal Reserve) by a half percentage point to 5.25%.

The market responded euphorically and by the close on Friday, the Dow Jones Industrial average stood at 13820.19, just 180.22 points from its all-time high set July 19th of this year.

The gain for the week was 2.8% which, on top of last week's gain of 2.5% gave the Dow its best two-week performance since November of 2004.

This of course was welcome relief to the downward pressure the market experienced over the last six weeks, but don't expect the real estate market to suddenly reverse course, or the subprime woes in the credit markets to suddenly disappear.

And some economists have warned that inflation may be accelerated by the lower rates. A worst-case scenario for the economy would be for inflation to rekindle before the rate reduction could aid growth to our slowing economy.

The effects of slower growth and plunging home prices have taken a toll lately on consumers, whose homes tend to represent a large portion of their wealth. When home prices are falling, consumers are less likely to borrow against their homes to make purchases of other goods.

They are also less likely to spend money on major home improvements. According to Citigroup, purchases of housing-related durable goods rose 10.2% last year but were up only 4.4% through July of this year.

To be sure, the rate cut is good news for borrowers with home-equity lines of credit. The rate cut should also reduce payments on credit cards and car loans. There should also be added liquidity in the credit markets that will make it easier to get a loan, although lenders will still exercise more caution than in the past.

Whenever we experience turmoil in our economic lives, such as we have in the recent past, it is a good time to re-valuate our goals and objectives. You have to know your risk tolerance. When it comes to evaluating the success of an investment plan, the average investor focuses on the end result - the performance of their investments.

However, return is just one component of an investment process, and it is the one over which investors and their advisors are exposed to the most variables.

Risk on the other hand, or the likelihood of achieving a target return, can be controlled. Because return and risk are inextricably linked, the success of any investment plan depends on the strategies for managing risk.

You have to reach down and examine your ability to absorb the turmoil. Know your investment objectives. Are they preserving principal and earning a moderate amount of income? Generating a high amount of current income? Generating some current income and growing your assets? Growing your assets substantially?

Remember - The chief cause of failure and unhappiness is trading what you want most for what you want now.I invite your questions.

Or Contact Jerry Cole at:
509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055

(The opinions expressed are solely those of the author and not Gen worth Financial Securities Corporation.)

I invite your questions.

Or Contact Jerry Cole at:
509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055

(The opinions expressed are solely those of the author and not Gen worth Financial Securities Corporation.)

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Jerry Cole - Retirement, Investment

Jerry Cole has been a Financial Planner for almost 30 years in the Tri-City area and holds and MBA from USC.
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