Rates React to Fed's Surprise Cut

WASHINGTON, DC-Yesterday, citing rapidly worsening economic conditions, the Federal Reserve cut two key interest rates by three-quarters of a percentage point. It lowered its federal funds rate to 3.5% and its discount rate to 4%.

The unexpected move precedes a scheduled meeting, during which Federal Reserve chairman Ben Bernanke was widely expected to cut rates–and if in fact Wall Street is divided as to whether the Fed will cut rates during the session once more. The monetary authority has taken a whack at interest rates outside of its traditional schedule before: the day the market reopened after the Sept. 11 terrorist attacks it cut interest rates by a half-point. Market watchers, though, have to reach back to 1984 to find a precedent for the size of these cuts.

Market reaction to the Federal Reserve Bank’s surprise cut in two key interest rates has been positive, with initial signs suggesting it may nudge long term rates down, at least slightly. “It is always a crapshoot to see what affect a cut will have on long-term interest rates,” Colin Whittier, VP of KeyBank Real Estate Capital tells GlobeSt.com. The early signs, though, is that it will have a downward effect. Hours after the Fed made its announcement the 30-year Treasury yield was down three basis points; the 10-year yield down nine basis point; five-year, down by 14 basis points and the two-year by 21 basis points.