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Fed Cuts Interest Rate, Oil Prices Soar

In theory, half-point cut should be good news for consumers

By Truman Lewis
ConsumerAffairs.com

September 18, 2007

In theory, the rate cut should be good news for consumers but no sooner was the action announced than the price of crude oil soared to record highs. Traders took the interest rate cut as a sign that energy demand would remain high.

In New York, crude prices climbed 94 cents to a record close at $81.51 dollars a barrel. Oil prices were already strong as supplies remain tight heading into the winter.

Besides cutting the key federal funds rate, the Fed also cut its discount rate for direct central bank loans by 50 basis points to 5.25 percent.

There had been speculation the rate cut would be only a quarter of a point.

"Today's action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time," the Fed said in a statement.

Stocks soared on the news. The Dow Jones industrial average registered its biggest one-day gain in almost five years.

The action by the Fed could mean that consumers will enjoy lower borrowing costs for cars, homes and other big-ticket items. But investors remain concerned about deeper trouble in the mortgage markets, making it hard to predict the outcome.

A report earlier in the day carried the grim news that foreclosure activity jumped in August, surging 115 percent over last August, 36 percent over July.

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