Myron Kandel: Fed stuns Wall Street with surprise rate cut

Myron Kandel

CNN Financial Editor Myron Kandel reports on the surprise rate cut by the Federal Reserve. The Fed cut the Federal Funds rate by a half-percentage point, marking the first time since 1998 the central bank lowered borrowing costs.

Q: Was the size of Wednesday's rate cut a surprise?

KANDEL: The timing and the size of Wednesday's rate cut were a big surprise. A lot of people were thinking the Fed might cut rates before its policymaking meeting on January 31. Some people were saying they might do so after employment numbers were out on Friday.

But nobody was really looking for the rate cut Wednesday. And very few people were looking for a cut of a half percentage point.

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KANDEL: Don't forget that the Fed at its previous three meetings did not raise rates. They raised rates six times starting in June of 1998, but they've stood pat in the most recent meetings. In the December meeting, they didn't change rates, but they did change what they call their `bias' from worrying about inflation to worrying about a slowing economy.

The stock market was certainly disappointed that the Fed did not cut rates at the December meeting. And then, as we saw the markets continue to tumble as we got more indications of a slowing economy, the Fed obviously felt the need to cut rates Wednesday.

Q: How did investors react to the announcement?

KANDEL: Investors read this move very favorably. The Dow Jones Industrial Average, which was in the minus column before the Fed announcement came, shot up more than 370 points within an hour after the announcement. The Nasdaq was up 10 percent of its value at one point after the announcement, and that's an amazing increase.

So, it's good news for investors. And the Fed also indicated that it is ready to cut rates again should the need arise.

Q: So, a good New Year's gift for investors after last year's heavy beating?

KANDEL: Yes, especially after the first day of trading of the new year on Tuesday when the market took a big hit.

I think that (Tuesday's tumble) probably was one reason why the Fed was alarmed that things could be getting out of control. And so, they felt the need for a big move, and a big move right away. Lower interest rates are good news for stock market investors.