Russell 2000 rallies on Fed minutes
The Russell 2000 (NYSE: IWM) and the Dow posted solid gains today, propelled by news that the U.S. Federal Reserve was united in its decision to cut interest rates on Sept. 18. The small-cap index added 5.58 points, or 0.66%, to 845.72. The Dow Jones Industrial Average (INDU) climbed 120.80 points, or 0.86%, to a new record close of 14,164.53. The previous record close was 14,087.55, on Oct. 1.
The U.S. Federal Reserve’s decision to lower the federal funds rate on Sept. 18 was unanimous, according to the meeting’s minutes released today. The federal funds rate is the rate at which commercial banks make overnight loans to each other.
The minutes show that all 10 members of the Federal Open Market Committee (FOMC) agreed to lower the target interest rate to 4.75% from 5.25%.
“In order to help forestall some of the adverse effects on the economy that might otherwise arise, all members agreed that a rate cut of 50 basis points at this meeting was the most prudent course of action.”
The FOMC left the meeting without a set plan of action for the future, instead deciding to monitor the situation and act as needed “to mitigate the adverse effects on the economy arising from the disruptions in financial markets.”
Stocks reacted to the news, which was released at 2 p.m. ET, with an immediate jump. The Russell 2000 climbed into negative territory after spending most of the afternoon on its back, while the Dow turned small gains into strong gains.
Equities were largely treading water before the release of the Fed’s minutes, following news of strong earnings from a major player and more pain stemming from the subprime meltdown.
Louisville, Ky.-based YUM! Brands, Inc. (NYSE: YUM) reported that net income increased to $270 million, or $0.50 per share, while 15 analysts polled by Thomson Financial were expecting earnings of $0.45 per share. A year earlier the company had a profit of $230 million, or $0.42 per share.
The better-than-expected quarterly results at the operator of fast food restaurants were due to strong performance in its international division, particularly in China.
Meanwhile, single-family residential mortgage lender Thornburg Mortgage Inc. (NYSE: TMA) revised up its losses from the sale of mortgage-backed securities. The Santa Fe, N.M.-based provider of jumbo mortgage forecast losses from those sales will amount to $1.1 billion, compared with a previous forecast of $863 million.
Credit rating agency Standard and Poor’s estimated today that the crisis in the subprime mortgage sector will not peak until 2009 and could cause defaults of as much as $150 billion.
