Instability still on horizon

NEW YORK – The Federal Reserve swept into the market this past week to offer a calming hand, but that’s still no panacea for the fundamental problems Wall Street faces.

Big institutional investors from hedge funds to investment banks are still wrestling with credit problems spawned by distressed subprime mortgage loans. The housing market still looks gloomy. And the wave of takeovers that drove stocks to new highs this year has dropped off considerably.

The Fed’s discount rate cut and injection of billions of dollars into the banking system alleviate only some of the stress. Wall Street observers say there is still plenty of risk out there and that the aftershocks from the failure of billions of dollars in subprime loans have yet to be felt.

“What the Fed did was about consistent with putting a Band-Aid on a gunshot wound,” said Chris Johnson, founder of Cincinnati-based Johnson Research Group. “You have a situation where the subprime concerns have spread, and there are still a lot of things going on in this market that are just wrong.”

Investors are really hankering for a more important interest rate cut – in the federal funds rate – when policymakers meet next month. That would lower borrowing costs on everything from school loans to mortgages, and also help stimulate the economy. But there’s a catch even with a fed funds cut – it would take months for the benefits to be felt.