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Wall Street Reacts Badly to Fed Rate Cut


For the seventh time this year, the U.S. Central Bank has cut interest rates. Wall Street reacted badly as pessimism about the U.S. economy continues, despite this latest cut.

The Dow Jones Industrial Average ended the day with a loss of 1.5 percent. It closed at 10,174. The NASDAQ fell as well, losing 50 points, 2.6 percent to 1,831. And the broader S&P 500 lost 1.25 percent to finish at 1,156.

Analysts attribute the drop to a pessimistic statement by the Federal Reserve, released along with the interest rate cut. The Fed said profits and capital spending continue to weaken. In addition, the statement noted that economies overseas are still suffering - which will contribute to slowing the U.S. recovery, when it does eventually get underway.

This latest cut marks the seventh time this year rates have gone down. At the beginning of 2001, U.S. interest rates stood at 6.5 percent. Now, that number is 3.5 percent. In announcing the decision, the Federal Reserve is conceding the U.S. economy is still weak and not yet on the rebound. It also signaled it may need to cut rates again later in the year.

Janet Yellen, a former Federal Reserve Board Governor, says as the Fed tries to help create the conditions for the markets to recover, other threats to the economy remain.

"Well I think investment spending and the world economy are the points of greatest vulnerability," she said. "The consumer sector has held up so far, along with housing. But on the other hand, if you start to have continued job cuts, big announcements in layoffs, cuts in working hours, the consumer could falter as well. And then I think the economy would really be in trouble."

Traditionally, when interest rates are lowered, the dollar slips against other major currencies. That is likely to be seen throughout the rest of the week. But later this month the European Central Bank is expected to follow the Fed's lead and cut rates itself. That means any gains made by the Euro over the dollar should be minimized by the beginning of September.

Apart from the interest rate cut, there are other positive signs on Wall Street for the retail sector. Throughout the summer, major retailers like The Gap have been forced to post losses and reduce profit estimates as sales have remained flat.

However, the retail chain, Target, has bucked that trend announcing it has met second quarter forecasts. The announcement follows a recent pattern of discount retailers like Wal-Mart and K-Mart continuing to outperform the more expensive companies like the GAP.

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