Fed rate cut may spark rally on Wall St. By JOE BEL BRUNO, AP Business Writer

Fed rate cut may spark rally on Wall St. By JOE BEL BRUNO, AP Business Writer
Sat Sep 15, 5:40 AM ET



NEW YORK - Wall Street players aren't the only ones with a lot riding on whether the Federal Reserve cuts interest rates on Tuesday — Main Street could also see some pretty dramatic benefits.

Policy makers are widely expected to decrease short-term rates by up to one-half of one percentage point, a move big institutional investors have been clamoring for in recent months.

For the man on the street, a cut would lower credit card bills, make mortgages cheaper and perhaps inject enough confidence into the stock market to revive ailing 401(k) investments.

Economists will likely debate until the 11th hour what the Fed will do when it releases its decision Tuesday afternoon. Even those far removed from high finance are nervous about what could be the biggest decision the Fed has made in years.

"Customers have told me not to touch their loans until the Fed meets," said Darin Hardin, owner of San Clemente, Calif.-based Coastal Hills Mortgage Inc. "People have been assuming for the past six months that rates will be lowered, and nobody wants to make a move until some kind of event happens."

Hardin said his business has been slower in brokering mortgages in California's Orange County, one of the nation's hottest real estate markets. New calls for mortgages aren't coming in as frequently, and those looking to switch to fixed-rate financing from adjustable have been stalling.

A cut in interest rates would immediately make fixed-rate mortgages cheaper. Homeowners with lines of credit will pay less, and those "waiting on the fence to borrow" will have reason to pick up the phone, he said.

A whole host of other borrowings will also become cheaper as U.S. banks follow an interest rate cut by lowering their own prime rates. For those that qualify, loans spanning everything from automobiles to education will be affected — as will the amount consumers are charged by credit cards issuers.

There's also the psychological impact a rate cut would have on the stock market, where the Dow Jones industrial average has plunged into volatility after hitting an all-time high in July. Traders have been cagey since then, sending the blue chip index bouncing around with triple-digit swings.

Wall Street pundits have pinned their hopes on a rate cut to stem the choppy market conditions, and send stocks higher. That would bring welcome relief in the short term to individual investors whose stock portfolios have fallen in the process.

"The whole thing with the stock market is perception," said Adam Hewison, president of ino.com, a financial Web site catering to individual investors. "We've had a five-year expansion in stock prices, and in the history of things, that's a long time before there's some kind of retrenchment. That has investors on edge."

While a rate cut would likely give the markets a short-term boost, whether its effects would be long lasting remains unclear. There are still a number of economic challenges facing individual investors, with some economists believing that the U.S. might be heading into a recession.

Though a cut might help boost mortgages, it might do little to help the slumping housing industry. Stocks might rally if the Fed delivers, but it won't help some of the underlying problems behind why corporate earnings are weakening.

"As far as rate cuts, when the Fed begins changing direction, there's a very short-run relief rally," said Tom Wilson, managing director of institutional investments at Brinker Capital. "But you have to keep in mind that they are cutting because there is something not right with the economy in one way or another."