The Federal Reserve Board today lowered short-term interest rates by 25 basis points, cutting the federal funds rate to 3.5% and the discount rate to 3% in the Feds seventh rate cut this year. In its statement, the Fed noted that "business profits and capital spending continue to weaken and growth abroad is slowing, weighing on the U.S. economy.
The Feds statement should lead to a short-term rally in bond prices, but ultimately its concerns about inflation could lead to a tightening in interest rates and affect bond prices, said Casey Colton, American Century vice president and portfolio manager of the $1.5 billion American Century Ginnie Mae Fund. The move also could be positive for the equity market "as the Fed is trying to be somewhat accommodating and keep borrowing costs down for corporations as they try to rebuild their inventories, he said.
But Erwin Will, a consultant at the $37.6 billion Virginia Retirement System, Richmond, expects the Feds move will have very little impact on the stock market. The Fed is more effective at slowing the economy through raising interest rates than at stimulating the economy by cutting interest rates, he noted. "Its much harder, and as you can see the economy is not doing anything great.