Rate-cut talk helps Dow erase 343-point loss

U.S. equities reversed sharp declines in trading today amid mounting market expectations that the Federal Reserve will cut its benchmark overnight interest rate in the near future, although a Fed official was quoted as saying only a “calamity” would prompt a rate cut.
The speculation helped stop a decline of as much as 343 points on the Dow Jones industrial average.
From the opening bell, stocks experienced steep losses on fears that subprime lending woes are spreading throughout the credit sector, while leading mortgage lender Countrywide Financial tapped its $11.5 billion line of credit and saw its credit rating downgraded. Adding to the concern was market talk that many investors have sent letters to hedge funds to request asset redemption by the end of the quarter.
The U.S. housing sector produced new signs of a downturn: housing starts fell 6.1% in July, their lowest rate in 10 years, while building permits slumped to an 11-year low.
The New York Fed injected $12 billion into the banking system via two repurchase agreements, accepting mostly mortgage-backed securities as collateral.
Although the repos were conducted below the 5.25% fed funds rate target, this failed to help markets.
“The current economic recovery probably cannot shoulder the double whammy of home price deflation and sinking share prices for long,” said John Lonski, director at Moody’s Investors Service.