Federal Reserve policy makers today slashed interest rates by half a percentage point, bringing the target federal funds rate to 4%. The Fed also cut the discount rate to 3.5%. The action was the Feds fifth rate cut this year. In a statement accompanying the decision, the Fed said it was still concerned about the possibility of continuing weakness in the economy and could cut rates even more. The markets responded meekly to the news.
Hugh Johnson, chairman and president of First Albany Asset Management, said the stock market already has discounted the effect of todays rate cut, but the Feds actions should help stem the decline in year-to-year corporate profits, possibly in the third quarter. Edgar E. Peters, chief investment strategist and chief investment officer at PanAgora Asset Management, expects an "initial positive reaction to the cut. Ultimately, Mr. Peters expects the stock market will end the year up around 10%, largely because of the rate cuts and the beginning of an economic recovery.
Casey Colton, vice president and senior portfolio manager for the American Century GNMA Fund, does not expect much of a rally in the bond markets because the rate cut already has been factored in.