Fed Rate Cut: A New Hope for Banks, Retailers and Homebuilders?

Since the last Federal Open Market Committee meeting, speculating about what the Federal Reserve would do with its fed-funds and discount rate has been a favorite topic for many investors. Now that the Fed has done what the market expected it to do: cut both rates by 25 basis points, what does this mean for investors?

To begin, the fed-funds rate is the interest rate at which a depository institution lends immediately available funds to another depository institution for overnight borrowing. These transactions happen everyday in order to balance the amount of reserves a bank holds against its current deposits. Lowering the fed-funds rate makes borrowing less costly and therefore certain businesses can benefit from such a FOMC action.

With a lower fed-funds rate, financial companies will be able to make larger profits due to a larger spread between short-term and long-term interest rates. Companies such as Citigroup (NYSE: C), Wachovia (NYSE: WB) and Wells-Fargo (NYSE: WFC) should now be able to more effectively borrow in the short-term.

Homebuilders and retailers will benefit from the Fed rate cut because its consumers are now more likely to borrow money in order to purchase goods in either industry. Retailers like Target (NYSE: TGT), Sears (Nasdaq: SHLD) and Macy's (NYSE: M) should see increased revenues because consumers will have more cash in their pockets. Homebuilders such as Lennar (NYSE: LEN), KB Homes (NYSE: KBH) and Toll Brothers (NYSE: TOL) will likely see an added benefit as interest rates become lower for consumers.

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