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Full Impact of Fed Move Will Take Time

A rally on Wall Street continued Wednesday as the major stock indexes closes higher for the second day in a row.

Investors are still reacting to Tuesday's big interest-rate cut by the Federal Reserve.

Fed officials decided to reduce rates by a half a point in a bid to help contain the economic damage from this year's mortgage crisis.


But the Fed's move may do little at first to reverse the big housing downturn now plaguing much of the country.

Whenever the Federal Reserve changes course it can have a huge impact on the financial markets. The effects of Tuesday's rate cut were plain to see a day later.

"We do see some knee-jerk reactions that are notable," said Lachman Achuthan of the Economic Cycle Research Institute. "One is that stock markets everywhere seemed to love it."

Investors seemed encouraged by the fact that the Fed was ready to step in and address a financial crisis that has sometimes seemed to be spiraling out of control, Achuthan said. There have been big losses in the subprime mortgage business and they have threatened to undermine the economy as a whole.

Outside the stock market there were scattered signs of a rebound Wednesday. Achuthan pointed to the London Interbank Offered Rate, a benchmark rate used to determine mortgage rates in the United States. It's come down in recent weeks and it fell a bit more Wednesday. That will be good for the real estate market, Achuthan said.


"You have lower home prices, but you're also having lower interest rates," he said. "This means that you're going to see more and more of the inventory clearing — both of new homes where there's a big overhang, and of existing homes."

But economist James Bianco was less optimistic. Though the LIBOR rate has fallen, he pointed out that it's still relatively high compared to the interest rates set by the Federal Reserve. That could mean that a lot of banks are still worried about the subprime crisis and reluctant to get back into real-estate lending.

"The problem is that there is a fear in the banking system that there are a lot more shoes to drop — bad loans we don't know about or other problems that we haven't conceived," Bianco said.

That means mortgage rates may not fall much, he said. And the number of houses on the market will grow. So too will foreclosures.

"We're not out of the woods yet, at least in the real-estate market nationally," Bianco said.

The impact of Tuesday's rate cut could be seen in other places as well. Lower interest rates make U.S. treasury bonds less attractive to foreign investors and as a result the dollar fell to a new low against the Euro.

That's a big plus for US exporters because it makes American products cheaper overseas.

Finally, a lot of traders seemed to think that the rate cut would spur economic growth around the world. That tends to affect energy costs and oil prices hit a record high of more than $82 a barrel.

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