Fed Cuts Interest Rates Half Point

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Wednesday April 18, 12:56 pm Eastern Time

Fed Cuts Interest Rates Half Point

Federal Reserve Unexpectedly Cuts a Key Interest Rate by One-Half Percentage Point

By JEANNINE AVERSA

Associated Press Writer

WASHINGTON (AP) -- The Federal Reserve, demonstrating it still has the capacity to surprise, cut a key interest rate by one-half percentage point Wednesday. Stocks immediately soared.

The rate cut was the fourth this year and the second outside a regularly scheduled Fed meeting. It took investors by surprise because Wall Street had given up hope that the central bank would cut rates before its next regularly scheduled meeting in May.

By early afternoon the Dow Jones industrial average was up 410 points and the Nasdaq had gained 178 points, topping the 2,000 level for the first time since March 15.

The Fed cut its target for the federal funds rate -- the interest that banks charge each other on overnight loans -- to 4.5 percent.

The Fed's action was quickly followed by announcements from Bank of America, Bank One and Wells Fargo of half-point cuts in the prime lending rate, to 7.50 percent. Other commercial banks were expected to follow suit.

The decision by the Fed's chief policy-making group, the Federal Open Market Committee, came during an emergency conference call.

``The Fed evidently has decided that the risk of an economic downturn had increased; therefore, they decided to take out an extra insurance policy to make sure that the economy does not slide into a recession,'' said Sung Won Sohn, chief economist for Wells Fargo.

``They sprung an element of surprise. What the market needed was a positive shock,'' he added.

The Fed cited a number of reasons for its action, including sluggish business investment, eroding corporate profits, economic turmoil overseas and a slide in the stock market, which could make business people and consumers fell less wealthy and less inclined to spend and invest. Consumer and business investment has been a main engine of economic growth in the past.

Taken together, this climate ``threatens to keep the pace of economic activity unacceptably weak,'' the Fed said in a statement.

In the past, Fed Chairman Alan Greenspan has said one of the biggest factors affecting whether or not the economy slides into a full-blown downturn is whether consumer confidence holds up during the slowdown.

The Fed's previous cuts this year totaled 1.5 percentage points.

The Fed on Wednesday also cut its mostly symbolic discount rate by a half point to 4 percent. The discount rate is the interest that the Fed charges to make direct loans to banks.

``Capital investment has continued to soften and the persistent erosion in current and expected profitability in combination with rising uncertainty about the business outlook seems poised to dampen capital spending going forward,'' the Fed said in its statement.

The economy grew at an annual rate of just 1 percent in the final three months of 2000, the weakest performance in more than five years. Many economists believe the economy continued to lose altitude in the recently ended first quarter. Some analysts project that economic growth stalled during the January-March quarter and others say it may actually have slipped into reverse.

The Federal Open Market Committee, which includes Greenspan, Fed governors and five of the 12 presidents of the Federal Reserve banks, held the emergency conference call at 8:30 a.m., Fed officials said.

The Fed's next scheduled is May 15.

In the part of Wednesday's statement that reflects possible future action, the central bank maintained its position that the biggest threat to the economy is recession, not inflation.

``The committee continues to believe that against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future,'' the Fed said.

The Fed said its action followed a review of the economy's prospects in light of data that became available since its last meeting March 20.

-- (M@rket.trends), April 18, 2001

Answers

Fed Slashes Rates in Rare Move

The latest Fed action, taken after an early morning conference call between Fed Chairman Alan Greenspan and other FOMC members, brings the federal funds overnight bank lending rate down to 4.5 percent -- its lowest level in more than 6-1/2 years. That was just before the Fed raised the fed funds rate to 4.75 percent in August 1994.

-- (M@rket.trends), April 18, 2001.


I wonder what the Fed is going to do once it has reduced the federal funds rate to practically nothing (if it hasn't already). I also wonder what makes the Federal Open Market Committee confident that the "positive shock to the market" will not soon wear off (and with one whale of a hangover).

-- David L (bumpkin@dnet.net), April 18, 2001.

Wondered that myself David. Japanese banks are at zero with no takers.

Wondered also if there might be a California component trying to bolster industry before before this summer's debacle.

-- Carlos (riffraff@cybertime.net), April 18, 2001.


They're likely pushing on a string. That's why Bush & company want to have a tax cut, to get cash into the hands of people ASAP so they'll start spending again and rescue the economy. It's not likely to work though, as more and more people see their friends get laid off. People without jobs and their scared friends don't spend so freely during a recession. Although Cherri & friends like to blame Dumbya, the real culprits are Clinton, Rubin, and Wall Street Friends who have been looting the American middle class for the last 8 years.

-- Albert Greenspanne (ready.or.not@here.it.comes), April 18, 2001.

http://www.dismal.com/todays_econ/te_041801_2.asp

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Relief, At Last

By Mark M. Zandi

04/18/01 12:50 PM ET

The Federal Reserve Board startled financial markets by cutting the federal funds rate target another 50 basis points, to 4.5%. This is the fourth 50 basis point cut in the target since the beginning of the year. The discount rate was also lowered 50 basis points, to 4%.

Financial markets had all but given up on another cut in the funds rate target before the next meeting of the FOMC set for mid-May. Speeches and other public pronouncements by Fed members since the last FOMC meeting in mid-March were generally upbeat regarding the economy's near-term prospects, suggesting that policymakers felt little need for more aggressive monetary action. The futures market for federal funds was attaching little probability to an inter- meeting cut in the funds rate target.

The proximate cause for the Fed's actions was the clear collapse in business investment, particularly for information technology. Recent corporate earnings releases and warnings by IT leaders Cisco and Intel, which were startlingly stark in their description of the downdraft in new business, were the likely catalysts for the Fed's surprise action. With IT investment crumbling, the principal source of growth for the economy since the mid-1990s has quickly turned into a substantial drag on the economy's performance. The implosion in IT also poses a substantial threat to underlying productivity gains that go to the heart of the future viability of the new economy.

The recent data regarding consumer spending, the only significant current source of economic growth, is also worrisome. Retail sales have gone flat since a brief spurt in January, and the automakers are intimating that their sales, which had held up so far this year, have weakened in recent weeks. Moreover, while housing activity has remained resilient due to the positive effects of low mortgage rates, home sales and homebuilding appear to be slowly deflating under the weight of the weak job and stock market. March's employment report and a continuing rise in weekly unemployment claims point to growing weakness in the nation's job market.

Policymakers must also be concerned about signs of developing financial distress. Personal bankruptcies and consumer and mortgage delinquencies are surging, and there is a quickly growing list of corporate bankruptcies. Commercial banks are experiencing rapidly deteriorating commercial and industrial loan quality. Already wide credit spreads in the corporate bond market are widening further and commercial paper outstanding is falling as investors shun the short- term liabilities of previously blue-chip but currently cash-strapped nonfinancial corporations.

Rising credit concerns are threatening the willingness and ability of lenders and investors to extend more credit to consumers and businesses. According to a special Fed survey of senior loan officers at major commercial banks in early March, bank lenders continue to significantly tighten underwriting standards to their commercial borrowers. The equity market is no longer a source of new funds for businesses as IPO activity has all but evaporated. Bond issuance has rebounded since nearly freezing up prior to the Federal Reserve's surprise easing in early January, but the wider credit spreads suggest that investors may be growing anxious again.

Policymakers have significant latitude to ease aggressively since their principal objective of low and tame inflation has been met. Excluding energy prices, which appear to have peaked, consumer price inflation remains close to 2.5%. Leading inflation indicators signal that future inflation will remain well contained. Prices for a wide range of non-energy commodities are actually falling, and industrial prices are at best flat as the contracting manufacturing base is pushing capacity utilization rates lower. Even the value of the dollar remains near record highs against a plethora of currencies.

While policymakers are clearly scrambling to catch up to economic events, there remains a reasonable probability that they will succeed in circumventing an economic downturn. The key will be sentiment. If the confidence of investors, creditors, consumers and businesses is restored by today's actions and the actions to come in coming weeks, then the expansion will make its way through to year's end.

-- (M@rket.trends), April 19, 2001.



M@rket.trends, David L, Carlos, & Albert Greenspanne,

I fully believe that the U.S. stock market and the U.S. economy are in for some seriously bad times ahead.

As you have so astutely pointed out, the Fed has great control over the short end of the yield curve (well, at least until they get near 0%, like it currently is in Japan). However, the Fed's control over the long end of the yield curve is another matter entirely.

I think that the bond market has realized that the Fed is intent on trying to "liquify" their way out of this mess, and that, of course, means inflation. I also think that the depth and frequency of these last four interest rate cuts have alerted some knowledgeable market players as to just how bad the situation is. Note that the yield on the 30 year Treasury bond has climbed from a recent low of around 5 1/4% shortly after the March 20th rate cut, to an intraday high of almost 5 3/4% today. Since the primary mandate of the Fed has been to try and control inflation, it will be interesting to see what tack they take as inflation rears its ugly head, while simultaneously, the stock market and the economy falter.

The most unfortunate part about the ensuing financial debacle will be that the financially ignorant masses will not only blame Bush for a situation that he did not cause, but that they will also blame him for not fixing a situation that neither he, nor anyone else, can fix.

-- J (Y2J@home.comm), April 19, 2001.

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