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Wall Street Slumps on Fed’s Gloomy Forecasts

21 may 2009 - News - Editor

Wednesday on Wall Street was off to a promising start as stocks surged in response to the news that Bank of America"s sale of 1.25 billion shares of stock had raised $13.47 billion, fueling investor hopes that the financial sector is in the process of stabilizing. The results of the government's bank stress test revealed that Bank of America would need $33.9 billion to protect it against losses in the event of the economy worsening. While $13.47 billion is far short of the stress test amount, the bank’s ability to raise that amount of cash nevertheless puts it on a steadier footing to cope with the rising rate of consumers defaulting on loan payments.

In the last hour of Wednesday's stock market trading markets slumped, wiping out earlier gains as investors bailed out in response to the release of the minutes of the Federal Reserve's April meeting where it was noted that the Fed has reduced its growth targets, as well as raising unemployment expectations. Furthermore the Fed has adjusted its expectations for the country's GDP, a broad measure of economic activity, to a decline of between 1.3 percent and 2 percent, whereas previous forecasts for the year had been for a 0.5 percent to 1.3 percent decline. So, all things considered, the Federal Reserve’s latest forecasts for the health of the U.S. economy are worse than they were three months ago. This gloomy forecast may have prompted investors who have been enjoying a short run of success to bail out while they are ahead. Analysts are of the opinion that the outlook is not all doom and gloom, with the minutes indicating that there is reason for optimism as the economy is responding to measures put in place by the Fed, such as the purchase of mortgages and Treasurys.

With the focus on getting the U.S. economy back on its feet, the Obama administration will be reassessing the HOPE for Homeowners plan, which is intended to assist homeowners to avoid foreclosure. Launched five months ago, the program has thus far only assisted one family, even though it had been anticipated that as many as 400,000 homeowners would benefit. It appears that there are too many terms and conditions attached to the plan, preventing people from applying. President Obama will soon be signing a bill into law that will remove many of the perceived obstacles in the program with a view to getting it going again.

President Obama is also expected to sign a bill on Friday which will make it tougher for credit card providers to raise interest rates and fees. The legislation will also make it very difficult for people under the age of 21 to get a credit card at all. While the banks are objecting to these measures, the high rate of credit card payment defaults is seen as an indication that stricter controls are essential. With consumer spending being a driving factor behind the health of the economy, it remains to be seen what effect the new measures will have.

 


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