After the stock market crash of 1929, thousands of banks failed. In 1933, Congress and then President Roosevelt created the Federal Deposit Insurance Corporation, better known to all of us as the FDIC. A federal government guarantee of deposits. Its effect was to maintain stability and public confidence in the nations banking system.

The failure of Indy Mac Bank has the FDIC stepping in to meet its obligations to payback account holders the value of their insured assets. It is not pretty and as the largest bank failure to date, it is testing the system in a trial by fire way.

But if you believe Senator Barack Obama, that there is “little doubt that the US is likely in a recession” and that swift steps to shore up the housing market are a huge part of that recovery then the FMIC is the obvious answer.

Another stimulus packages and pumping money into Fannie Mae and Freddie Mac are not the answer. The government keeps treating the symptoms and not the disease.

The majority of analysts and economists that look at the problem conclude that stopping home prices from declining is the first step in any recovery. But how are prices to stabilize when lending institutions are pulling back their lending?

As the desire to lend has decreased coupled with higher lending standards and higher levels housing supply, due to a poor economy and foreclosures in some markets, prices can only continue to drop. Actual credit losses and Fannie and Freddie are small compared with their overall portfolio. What they are suffering from is a crisis in confidence.

According to mortgage industry veteran Robert Kofsky, The creation of the FMIC to co-insure FNMA, FHLMC and the Mortgage Insurance Companies against further losses would create new confidence in the mortgage markets, create higher values for mortgage bonds, create additional liquidity for the banks and create additional capital for lending since risk would be reduced by the backing by the FMIC. Using minimum standard qualifying lending requirements, losses would be limited up to a specific dollar amount per property similar to the way the FDIC insurance works now. 

This would provide buyers financing to enter the market with confidence causing home prices to stabilize. Put a halt to or at least reduce write-downs on quality mortgages, create better balance sheets and enable in some cases financial institutions to write-up some exiting investments.

This would further reduce the foreclosures and the cost to the federal government would stay low saving taxpayers money. As it stands now, we are footing the bill for all of it. Rather than pump money into the system to treat the symptoms, let’s cure the disease which is a crisis of confidence. Our history tells us that the creation of the FMIC would have the same desired effect.

Using taxpayer dollars to bail out financial institution or throwing money at the problem like the Treasury and the Federal Reserve seem to do to in their keystone cop response to these situations, finding a viable long-term solution is the only way to cure what ails the financial markets and the economy.

For more information on issues facing retirees and retirement income strategies please visit www.livelongliverich.com.

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When it comes to investing in bonds, some of the basic concepts regarding bond risks tend to elude investors. Most understand the risks associated with stocks. If you invest in a stock, and its price increases, you make money, if it drops you lose. But bond risk has many different components. One of those risks is how the interest rate and maturity effect bond prices.

The maturity of a bond is the date on which the principal amount is repaid and the issuing organization returns your investment to you. You can buy bonds with maturities as short as one week or as long as one hundred years. Clearly the maturity (or maturities) you select should be aligned with your investment goals.

As a rule, most investors should consider bonds with maturities of 20 years or less. Many investors stagger the maturities of various bonds in a portfolio to create a “ladder structure”. This creates a blend of short-term and long-term maturities and interest rates.

If you hold a bond to maturity, assuming the bond you own is not in default, you will get back your initial investment. Between now and then, as interest rates fluctuate, the price of the bond will also fluctuate. That means the price of your bond will go up and down.

If interest rates rise, the current value of a bond will drop. If interest rates go down, the current value should rise. The relationship between interest rates and bond prices is inverse. The price of a short-term bond will fluctuate less than that of a long-term bond because the shorter the maturity, the sooner you will receive your principal back and the sooner you can reinvest at current rates. The shorter time frame reduces the risk that something can go wrong. Because there is less risk of price volatility with a short-term bond compared to a long-term bond, the interest rate should be lower on the shorter maturity. Shorter maturity, less risk, less interest. Longer maturity, more risk, higher interest rate.

What length of maturity should you buy if you think rates are going higher? The answer, shorter term maturities. The value of short term bonds is more stable in a rising interest rate environment. As rates rise, your portfolio will be more stable and you will have bonds maturing enabling you to reinvest at the current higher rate.

You can find more information about bonds and interest rate risks at www.livelongliverich.com and www.investinginbonds.com.

Explaining what can happen to the price of a bond is complicated and many factors go into the value of securities such as credit risk and trading environments. But as far as the relationship between rising interest rates and bonds are concerned, a picture speaks a 1000 words.

NEW YORK (Dow Jones)–With the stock market in the red again Friday 

following Thursday’s sharp decline, many investors seemed to be taking the 

week’s drop calmly. A few expressed worry but others bravely looked to wade 

deeper into the market. 

  Financial advisors around the country say that investors’ growing 

sophistication is helping clients remain stoic: They have already survived 

February’s downturn, and the concepts of asset allocation and long-term 

investing have been pounded into them. 

  That’s not to say that no one is nervous. 

  “They’re worried. They’re saying, ‘What’s happening with the subprime? Are 

the markets completely falling out of bed?’” said Arthur Black, a New York 

City wealth manager who has gotten about six calls from clients in the last 

week. “Markets like this give everyone enough of a scare to say ‘What’s 

happening here?’” 

  But with most major stock indexes up overall for the year, financial 

advisors say this week’s decline isn’t creating the kind of panic that it 

might have a decade ago. 

  “You don’t quite see what we used to see when the markets came apart. 

Investors seem to be more seasoned,” said Robert Weissenstein, managing 

director and chief investment officer for the Private Banking Americas unit of 

Credit Suisse Group (CS). “People do understand that markets can sell off 

without vaporizing entirely. There’s more of an ability to digest some of 

these moves.” 

  Craig Rappaport, Author: “Live Long Live Rich”a said that nowadays investors “see downdrafts in the market as an 

opportunity to buy things rather than to panic out.” 

  Indeed, many financial advisors reported that their clients were looking to 

buy into the market. Gene Foxworth, a Charleston, S.C. financial advisor, said 

an 81-year-old client called him about the drop. Although Foxworth thought the 

client had called out of worry, the man actually wanted to invest more money 

in stocks. 

  Bill Hilgedick, a financial advisor with Edward Jones in Eau Claire, Wis., 

said he is seeing the same reaction as some clients try to diversify by buying 

stock in sectors underrepresented in their portfolios. 

  “Yesterday was a busy day,” Hilgedick said Friday. “I was placing a lot of 

buy orders.” 

  For investors who engage in short-term trading, this week was rough, 

Rappaport said. “Do you know how to spell angst? Traders trying to enter and 

exit strategically are finding it not very doable in a market that’s 

collapsing,” he said. 

  Financial advisors were warning against bailing out altogether. David Tysk, 

a financial planner with Ameriprise Financial Inc. (AMP) in Bloomington, 

Minn., compared the markets to teenagers with a curfew: They won’t behave the 

way you want them to. 

  “We have to have a long-term strategy and methodology in place,” Tysk said. 

“We do people a big disservice by highlighting these big market swings. The 

markets are supposed to fluctuate. The markets are doing exactly what they’re 

supposed to be doing.” 

  The market’s loss, said Jerry Miccolis, a financial planner in Morristown, 

N.J., “was large in absolute terms…but in relative terms it was not 

dramatic.” On Thursday, “nearly everything went down. When you look at the 

whole market sliding, the last thing you want to do is liquidate.” 

  Many financial advisors want to keep their clients focused on the long haul. 

To that end, Foxworth said, he isn’t even reaching out to clients to head off 

their anxiety. 

  “We talk to people about asset allocation and long-term investing,” he said. 

“To pick up the phone and call people may send the wrong signal.” 

  Dick Bellmer, a financial planner at Deerfield Financial Advisors in 

Indianapolis, said a decline “doesn’t make anybody feel good.” He said he 

constantly reminds his clients of the importance of sticking to predetermined 

asset allocation, regardless of where the market moves. 

  He has reassured some clients that, despite this week’s drop, their 

portfolios are up overall for the year. “If people don’t panic, they’ll be 

better in the long run,” he said. 

  Adam E. Carlin, a financial advisor with Citigroup Inc.’s (C) Smith Barney 

in Coral Gables, Fla., received two calls since the market dropped - both from 

new clients. One, a doctor from New York, emailed Carlin shortly before the 

market decline to say that she wanted to discuss investing more aggressively. 

Out of concern that she might not have understood the risks, he emailed her 

back to say that he wanted to meet and talk this over. After the market 

dropped, he contacted her again, and she replied that maybe she had gotten a 

bit ahead of herself. 

  “Once you have had an opportunity to educate clients,” Carlin said, “you 

don’t get the panicked emails or phone calls.” 

There’s theory and then there’s reality. In theory, would-be retirees and retirees need not alter their investment portfolios in the wake of the stock market’s recent gyrations. In reality, it’s not as easy as it seems — even if you have taken the trouble to get your asset allocation right. Emotions play a huge roll.

Consider, for example, the hypothetical portfolio of a would-be retiree who is seeking an 8% per year return from their nest egg. A person with designs on that kind of annual return might invest 19% of their money in large-cap equity, 7% midcap equity, 12% in small-cap equity, 26% in international equity, 13% in emerging equity, 9% in REITS, 5% in long-term government bonds, 7% in international government bonds and 2% in Treasury bills.

With that kind of portfolio, the projected value of a $1 million portfolio would be $1.4 million in five years.

But the long-range view smoothes out what could be some major turbulence: There’s a 66% chance that any one year’s return could be anywhere from up 21% to down 4.9%. And then there’s a 2.5% chance that that portfolio would fall more than 17.8% in any one year.

A portfolio with that make-up is now down roughly 15% since the market peak in October, causing not theoretically jitters, but real-time jitters.

Yes, we know that when investors have a long-term horizon, say 15 years, it’s unreasonable to judge investment performance through a three-month lens. That can be easier said than done, but there are countless examples of where having a long-term perspective is the best one of all.

“As trite and boring as it may sound, the best advice is to just stick with a prudent long-term plan and ignore the short-term noise,” said Rande Spiegelman of Charles Schwab.

Christine Fahlund of T. Rowe Price said investors need to hold tight.

“This is not the time to sell investments in the stock market. It may be the time to learn from your emotional experiences,” she said. “Perhaps this is more of a roller-coaster ride than you had bargained for. If so, once the market is back on its feet again you may wish to reallocate somewhat more to bonds and bond funds and somewhat less to stocks and stock funds.”

“However, you should not consider dipping below an allocation of about 40% equities, since retirement can be a very long time — three decades perhaps — and you will need growth to keep up with inflation.”

Drawing Your Blueprints

Of course, the tricky part to all of this is that you do need a plan, an investment policy statement. Yes, investing is, in some ways, a bit like building a house. You need an architect’s drawing and structural plans that a general contractor uses to build the finished product.

In other ways, however, investing is nothing at all like building a house. No general contractor would ever say there’s a 66% chance that the house will like a colonial and a 5% chance it might look like raised ranch.

But what tends to happen is that most people invest using their neighbor as their benchmark instead of taking the time and energy to create their own plan. With a plan in place, there’s a good chance you’ll have a portfolio that is properly diversified. And diversification, said Fahlund, “is critical to dampening the overall volatility of your portfolio under all market conditions.”

Besides having a plan, Fahlund suggests that those who might already be in retirement reduce their spending and withdrawals from investments wherever possible.

“It is “overspending” when the market is down that could result in your running out of money before the end of your retirement,” she said in an email. “Examine your current budget carefully and consider what you can “go without” for the time being.”

“This won’t be easy, but it may be necessary. It is one of the most effective tools available to you at this point in time in the history of the markets.”

As the markets creep closer to “bear” status, financial advisors see managing fear as their top priority.

Many financial advisors are telling nervous retail investors to sit tight and keep their emotions in check as they watched stock markets around the world sell off on Monday and early Tuesday, and with bears and bulls struggling this morning for the U.S. stock market. In some cases, new clients have canceled appointments due to nervousness about the market.

And it’s not just clients that need hand holding: experienced financial advisors are talking to their younger colleagues, trying to assure them that this, too, shall pass.

Some advisors are encouraging clients to take a defensive stance, moving some of their assets into cash or bonds to protect them from the market’s decline.

To be sure, many financial advisors and clients remain confident that the markets will bounce back eventually, continuing the upward trend that is a staple of the U.S. financial system. Some cite the increased focus on asset allocation since the 2001 technology bust as preventing nervousness from becoming outright panic.

But that doesn’t make things easier for the near-retiree watching his savings dwindle.

“The market fluctuations create a much higher level of anxiety because they no longer have a salary coming in,” said Craig Rappaport, a financial advisor with Janney Montgomery Scott in Radnor, Pa., who said he’s hearing more from his clients who are at or near retirement than from other age groups. “They tend to feel more vulnerable.”

Even clients who aren’t close to retirement are getting skittish. One broker at Citigroup Inc.’s (C) Smith Barney said clients who just put money into the markets are frustrated, and that some potential new clients have canceled appointments because of the market’s uncertainty.

Part of that anxiety stems from helplessness, Rappaport said: “This is a market that’s being pushed around by the big boys,” he said, noting that short-term maneuvers may work well for hedge funds, but not for retail investors. “When you look at markets in the past, it’s generally people who feel they need to do something that end up on the losing end of the trade.”

An advisor in the southeast U.S. at a major brokerage firm said advisors who reach out and are responsive to client concerns during market turmoil can pick up new clients, provided clients’ investment returns aren’t seriously lagging their benchmarks.

Brokers aren’t immune from fear, either. Veteran financial advisors who have seen the markets’ ups and downs over a decade or more are holding the hands of their junior colleagues, said one Merrill Lynch & Co. (MER) financial advisor.

“We’re telling the younger brokers not to panic because they haven’t gone through this,” he said.

Some financial advisors said they’ve seen the market’s decline coming for a while, and adjusted their clients’ portfolios accordingly.

David Kudla, a financial advisor in Grand Blanc, Mich., said his firm now has the highest levels of cash it has had in the last three-and-a-half years. The market reached a high on Oct. 9; he said his firm started to increase its cash position within a week.

William Supper, a certified financial planner at Massey, Quick & Co., a wealth management firm in Morristown, N.J., said he and his colleagues have also increased the cash portions of their clients’ portfolios to reduce volatility.

“Coming into this, we’re very defensively positioned,” Supper said.

In addition, Supper said he’s been shifting client portfolios toward long and short equity positions so they’ll be prepared for buying opportunities should they arise. Now Supper is trying to figure out whether the market is close to the bottom and whether buying makes sense yet.

Indeed, the concept of buying stocks on sale seems to be another message that financial advisors are trying to get their clients to absorb in the down market. Tom Orecchio, a principal with Greenbaum and Orecchio, a wealth management firm in Old Tappan, N.J., said he’s telling clients, “We’re going to buy it as it drops and sell as it goes up. That allows us to consistently and objectively buy low and sell high.”

The other key to quelling clients’ fears is to focus on asset allocation and to walk them through their portfolios to see if rebalancing would make sense.

“You need to have a big enough umbrella to keep dry when it’s raining like this,” said Joe Montgomery, a financial advisor with Wachovia Corp.’s (WB) Wachovia Securities in Williamsburg, Va. “We’ll revisit those (portfolios) and make sure they’re properly positioned to continue on in their happy retirements. If we’ve done a good job of explaining, they understand they’re in the right position.”

Others are looking on the bright side. One broker at RBC Dain Rauscher, a unit of Royal Bank of Canada (RY), reported that his office phone was ringing off the hook before the market opened Tuesday. Clients were anticipating “a 600-plus” point drop in the market, he said, “But right now, it’s only down 260.”

WASHINGTON — A “large proportion” of U.S. workers are unlikely to save enough through their 401(k) or other defined contribution plans to last them through retirement, a government report released Tuesday said.

The study by the Government Accountability Office said that the defined contribution-based system, which has largely replaced the more traditional pension plan, faces and presents “major challenges” for workers.

“While some workers save significant amounts toward their retirement in [defined contribution] plans, a large proportion of workers will likely not save enough in [defined contribution] plans for a secure retirement,” the study said.

The GAO found the trouble with contribution-based plans was particularly acute for low-wage workers. The preferential tax treatment of contributions is unlikely to entice low-wage earners, since these workers already face low marginal tax rates. Additionally, making a contribution out of their take-home pay may not be possible, the study said.

“Many of these workers face competing income demands for basic necessities that may make contributions to their retirement plans difficult,” GAO said in the study.

The report, prepared at the behest of U.S. House Democrats, provoked concern on Capitol Hill.

“Today’s workers will more likely struggle to make ends meet during retirement than previous generations,” Rep. George Miller, D-Calif., said in a statement. “While Social Security faces long-term challenges that must be addressed, this GAO report makes it clear that the real retirement security crisis is the lack of savings in private retirement plan.”

Miller, who chairs the House Education and Labor Committee, noted that GAO projected that 37% of workers born in 1990 and just now entering the workforce would reach retirement age with no savings in a 401(k) or similar account.

Rep. Rob Andrews, D-N.J., said the report shows the “need for action is imperative.”

“Today’s GAO report is a clear indication that a large portion of Americans are heading toward retirement insecurity,” Andrews, who chairs the subcommittee with oversight over pensions issues, said in a statement.

The GAO study suggested policy-makers could take steps to boost the projected savings in defined contribution plans. These ideas include making workers instantly eligible to participate in a 401(k) or similar plan when they enter the workforce, as well as automatically rolling over workers’ retirement savings into a new plan when they leave a job.

NEW YORK — High-yielding utility stocks, a group that has been struggling of late, stand to see something of a potential resurgence following the Federal Reserve’s decision to cut interest rates by 50 basis points on Tuesday, technical analysts say.

The group has certainly pulled back from its spring highs, with the Philadelphia Stock Exchange Utility Index, or UTY, after peaking at 572.89 on an intraday basis on May 15, now at 542.90, up 1.1%.

But now the sector is starting to look like it will be able to hold its own relative to the rest of the market, analysts say.

“The UTY has undergone a turning point, since it moved through resistance of 528, both on Tuesday and today,” said Katie Townshend, chief market technician at MKM Technical Research.

The 528 level is based on a “cloud model,” which is a Japanese trend-following indicator that some technicians use to gauge supply and demand.

“It looks to me like it is going to hold up,” Townshend said.

One reason is that the index, although having gone through a period of trending lower, had not done so, since late June, to the same degree as the Standard & Poor’s 500 Index.

Also, the index’s stochastics oscillator, a measure of overbought and oversold conditions, indicates that there is room before the UTY can be considered overbought, Townshend said.

But not everything is fully in place.

Momentum from the UTY’s recent low of 488.89 on Aug. 16 hasn’t picked up yet, “and that’s what I’m looking out for,” Townshend said.

But, on a weekly basis, the index remains in a long term uptrend because it still has higher lows in place, Townshend added.

Also, support remains intact, ranging from 475 on a long-term basis to 501.95, with the latter being the index’s March low.

With the Federal Reserve having cut its key short-term interest rate aggressively on Tuesday to 4.75% from 5.25%, utility stocks could have greater appeal because of their dividend yield.

The three highest payers on the S&P 500 are Progress Energy (PGN), at 5.3%; Pinnacle West Capital (PNW), at 5.2%; Integrys Energy (TEG), at 5.1%, all now above the new fed funds rate, which influences a myriad of other rates.

Progress Energy, at $47.40, is looking good right now, having broken through its 80-day moving average of $46.30, which has served as resistance since late May, said Ryan Detrick, senior technical strategist at Schaffer’s Investment Research.

In fact, shares hit that level on an intraday basis on Tuesday morning, before the Fed’s meeting announcement.

“Now that it has decisively broken through on heavy volume I wouldn’t be surprised to see the stock revisit its Aug. 9 intraday high of $49.48,” Detrick said.

Pinnacle West, at $40.30, has been pretty much been moving sideways since the beginning of July, which puts it in a neutral state as far as far as making a decision of whether to buy or sell shares.

Still, Detrick feels the stock is positioned to get past $41, based on the way it’s charting, creating a bottoming formation from which to move higher with some momentum.

If shares do breach $41 on a closing basis, he projects the stock could push upward on strong accumulation, or buying, and have a shot at $44.47, its June 15 intraday high.

Integrys Energy, at $52, has also been in a sideways consolidation pattern since late June, but has now broken out.

The breakout is based on the stock moving above a downward trendline on strong momentum on Tuesday.

“Now, the path of least resistance is higher,” Detrick said.

Federal Reserve Chairman Ben Bernanke moved aggressively to stop the spreading credit crunch from sinking the nation’s economy with a surprising half-percentage-point cut in interest rates, casting aside for now worries about appearing to bail out investors.

The cut, which exceeded the quarter-point reduction most economists had expected, signals that Mr. Bernanke, fearing broad damage from the market turmoil that erupted a month ago, preferred to risk doing too much rather than too little. The move came amid a sizable drop in home sales, construction and prices that could send mortgage defaults higher and damp consumer spending.

With yesterday’s move, Mr. Bernanke may have shown himself closer in style and tactics to predecessor Alan Greenspan than some market watchers had suspected. That carries risks: Critics may start referring to the “Bernanke put,” as they once spoke of the “Greenspan put” under the former Fed chairman. (A put option protects its holder from a loss on an investment.) Yet Mr. Bernanke has shown that giving the impression he might be shielding investors matters less than keeping the economy out of recession.

That’s how Mr. Greenspan interpreted the Fed’s action. “The question they had to weigh was, “Was punishing those [speculators] more important than doing something that they perceived to be in the greater good?’” he said in an interview yesterday with Fox News Channel’s Neil Cavuto.

The Fed cut its target for the federal-funds rate, charged on overnight loans between banks, to 4.75% from 5.25%. It also cut its discount rate, charged on direct loans to banks, by the same amount, to 5.25%.

The cuts sparked a rally on Wall Street. The Dow Jones Industrial Average, up just 70 points before the decision was announced, soared 335.97 points, or 2.5%, to 13739.39, its biggest percentage gain since 2003.

But in a sign some investors fear that the cut could also foster inflationary pressures, the dollar fell sharply, long-term Treasury-bond yields rose, and oil prices also jumped. Crude-oil futures surged 94 cents a barrel to $81.51, a second consecutive record on the New York Mercantile Exchange but still well short of the inflation-adjusted high of $101.57 hit in April 1980.

In a break from the past, the Fed did not say whether higher inflation or weaker growth was its greatest worry or whether those worries were equal; it thus gave no hint about what its next move would be. “Some inflation risks remain,” it said. But “developments in financial markets … have increased the uncertainty surrounding the economic outlook.” Markets put high odds on a quarter-point cut at the Fed’s next meeting, on Oct. 30.

The half-point cut put an exclamation point on a drama that began more than a month ago. At its last meeting, Aug. 7, the Fed left the federal-funds rate, its main target for short-term interest rates, at 5.25% and signaled continued worries about inflation. Days later, credit-market concerns erupted in Europe over losses in bank-linked hedge funds and off-balance-sheet investment vehicles that had purchased U.S. subprime mortgages. In the following weeks, investors and lenders became increasingly suspicious of each other and unwilling to lend, driving up interest rates for all sorts of borrowers.

On Wall Street, cries soon rose for the Fed to cut rates immediately. Instead, the Fed on Aug. 17 cut its discount rate by half a percentage point and eased terms on direct loans from its discount window in hopes banks would use the Fed’s cash to restore liquidity to credit markets. The aim, Fed officials said at the time, was to make a distinction between the Fed’s role of keeping the financial system functioning normally, and its responsibility for economic stability.

By contrast, Mr. Greenspan tended to treat financial stability and economic stability as inextricably linked, and saw a rate cut as the best way both to restore investor confidence and cushion the economy.

His critics say those cuts over time emboldened investors to take on ever more debt and drive asset prices — first stocks, then houses — to ever-loftier levels, making the ultimate correction more painful. That criticism has intensified both with the turmoil in housing and the recent release of Mr. Greenspan’s memoir.

Mr. Bernanke heard that criticism, but ultimately has shown himself of much the same mind as Mr. Greenspan: the Fed can’t take responsibility for asset prices, only for growth and inflation.

“Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally,” the Fed said in a statement accompanying yesterday’s decision. “Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets.”

Fed officials had been leaning toward a rate cut in recent weeks, but the case for the larger move may have been sealed by a report two weeks ago revealing that employment declined in August for the first time in four years. That showed the economy had slowed markedly even before the full force of the market turmoil had been felt.

As recently as July Fed officials had expected the economy to grow around 2.5% this year. While the Fed has lowered that forecast, the size of its rate cut was motivated more by the wide range of possibilities around that new forecast, due to the still-unknown reaction of business and households to tighter credit markets. The larger-than-expected cut represents insurance against more catastrophic scenarios.

The market turmoil is likely to hit housing first and hardest. Investors have grown wary of holding loans from all but the safest borrowers. That has led to a sharp jump in rates on “jumbo” mortgages — those above $417,000 — which can’t be sold to federally chartered mortgage giants Fannie Mae and Freddie Mac. The ranks of home buyers have thinned, especially in high-priced markets, and borrowers with shaky credit have difficulty finding a mortgage at any rate. The lack of buyers will likely drag down sales, make it even harder for home builders to trim bloated inventories, and force them to drop prices further.

John Makin, a scholar at the American Enterprise Institute, said even with the rate cut, the economy will probably shrink in the fourth quarter of the year, though by less than if the Fed hadn’t acted. “If the economy continues to weaken, credit conditions will weaken again because [of] falling housing prices. You’ve got to break that cycle, where you have bad credit, bad economy, bad credit, bad economy. They’re taking a first step to break that cycle.”

David Seiders, chief economist at the National Association of Home Builders, said even though Treasury-bond yields — the main determinant of mortgage rates — rose slightly yesterday, the rate cut might boost credit market confidence and lead to a narrowing in the spread between mortgage rates and Treasury yields, allowing mortgage rates to fall.

Several banks announced they were cutting their prime rates, the benchmark for many consumer and commercial loans, to 7.75% from 8.25%.

It was only a month ago the Fed declared it was still more worried about higher inflation than weaker growth. Those concerns haven’t entirely ebbed: yesterday the Fed said that while underlying inflation had “improved modestly this year … some inflation risks remain.”

Allan Meltzer, a Fed historian at Carnegie Mellon University, said the cut was a mistake, reminiscent of the 1960s and 1970s, when the Fed put more emphasis on unemployment and less on inflation in its actions. That caused inflation to ratchet higher over the years until Fed Chairman Paul Volcker brought it down again. “What’s the market saying?” Mr. Meltzer said. “That this is an expansive move that will bail out the economy.”

He added: “I never believed in the “Greenspan put.” But the market believes it, and now it will certainly believe there will be a “Bernanke put.’”

Some Fed officials may have shared similar concerns either about inflation or about the risk of stoking further speculation. Only seven of the Fed’s 12 reserve banks requested the half-point cut in the discount rate. Four of the five absent banks are headed by presidents who have raised such concerns. None of the four, however, have a vote on the Fed’s policy-making Federal Open Market Committee this year, and that may be why the vote to cut the federal-funds rate was unanimous.

As expected the Fed held the fed fund target rate at 5.25%

The statement said (for comparison the prior statement is immediately below today’s)

Economic growth was moderate during the first half of the year. Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters, supported by solid growth in employment and incomes and a robust global economy.

Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.

Although the downside risks to growth have increased somewhat, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the outlook for both inflation and economic growth, as implied by incoming information

Economic growth appears to have been moderate during the first half of this year, despite the ongoing adjustment in the housing sector. The economy seems likely to continue to expand at a moderate pace over coming quarters.

Readings on core inflation have improved modestly in recent months. However, a sustained moderation in inflation pressures has yet to be convincingly demonstrated. Moreover, the high level of resource utilization has the potential to sustain those pressures.

In these circumstances, the Committee’s predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.