A Note on the Fed Rate Cut

The Federal Open Market Committee on Tuesday cut its target for the federal funds rate by half a percentage point from 5.25 percent to 4.75 percent, which was on the high end of Wall Street analysts' expectations.

This policy decision is intended to mitigate some of the effects of the recent tightening of credit conditions and to promote moderate economic growth.  The Fed maintains that inflation risks remain but acknowledges that recent developments in financial markets have introduced an element of uncertainty and increased the downside risks to economic growth. 

While an announced cut of half a percent in the target for the federal funds rate may appear substantial the immediate impact on short-term interest rates should be more muted.  This is because in practice the Fed began targeting a federal funds rate of 5 percent in August. Therefore, today's action simply ratifies the easing already underway. Additionally, the Fed said it will continue to monitor developments in financial markets and the real economy, signaling the Fed’s tilt in the direction of supporting economic growth.

Despite the strong rally in stock prices, which followed the news of the cut, the current market volatility is likely to continue.  Given our desire to consistently grow our clients' portfolios year after year, TIAA-CREF encourages investors to take a long-term view and:

• Maintain the asset allocation plan that best meets your specific risk tolerance, investment time horizon and saving objectives. A well-thought out plan is a key to successful investing.
• Establish a diversified portfolio to help temper the effects of down turns in any particular market sector.
• Rebalance your portfolio periodically to ensure that your overall portfolio is consistent with your investment objectives and risk tolerance.

For additional information on reviewing your portfolio in light of market movements, read the Market Monitor article Check Your Asset Allocation Seatbelt, Again (PDF).