This could be the reason Greenspan cut rates -->
Now we know.... why they did it. I am puzzled, IS THE FED PANICKING OR WHAT? IS THIS BEARISH PR BULLISH?
Friday April 20, 6:24 pm Eastern Time
Fed scours First Call data before rate cut
By Chelsea Emery
NEW YORK, April 20 (Reuters) - The U.S. Federal Reserve is more concerned than ever about the dimming outlook for technology companies that had once been a leading light in the record economic expansion.
A sign of this is a Fed governor's early-morning call to market research firm Thomson Financial/First Call the day before the central bank stunned the market with a half-point interest rate cut that sent the stock market soaring. The rate-cut was the Fed's second between regularly scheduled policy-setting sessions, and its fourth this year.
``They (the Fed) had specific requests,'' said Joseph Kalinowski, a New York-based senior research analyst for Thomson Financial, who analyses the rate of corporate earnings growth for the Fed and other clients.
``They look for trends in earnings and they were really watching closely the tech earnings. They have a concern'' about how quickly profit growth is slowing, he said.
Earnings growth for technology companies is expected to slide by 32 percent this year, Kalinowski told the Fed governor, who Kalinowski declined to identify. That's the worst outlook since at least 1985, when his data begins.
The First Call data was just one piece in the reams the Fed collected before its decision to spring a rate cut on an unsuspecting American public on Wednesday. Still, it represents how the sagging tech sector has worried the board.
The Fed statement accompanying its Wednesday rate cut emphasized the U.S. central bank's worry that sagging profits were making companies reluctant to keep spending and were a new weak point for the economy.
``Capital spending has continued to soften and the persistent erosion in current and expected profitability, in combination with rising uncertainly about the business outlook, seem poised to dampen capital spending going forward,'' the Fed said.
This possible softening, along with other factors, ``threatens to keep the pace of economic activity unacceptably weak,'' the Fed wrote.
Thomson Financial regularly provides the Fed with information on the outlook for corporate profits, Kalinowski said, and it's merely one of hundreds of sources the government body relies on for up-to-date economic trend analysis.
Fed policymakers take periodic soundings of the economy's health through meetings with groups like the National Association of Manufacturers and the American Bankers Association, so it was not surprising that their they also consult Wall Street figures.
But its interest in technology companies' prospects was notable, since Fed Chairman Alan Greenspan has highlighted the important contribution that high-tech advances have made to productivity during the current record expansion.
While so-called Old Economy industries like automaking have been making progress in winding down excess inventories, the Fed has been monitoring the struggle by New Economy high-tech companies to get sales and production into line amid signs it may take much longer than for traditional goods-makers.
Kalinowski said he speaks with Fed policy makers at least once a week, though he declined to name them. The conversations range from five to 20 minutes each, and been taking place for about two years, though the days vary.
This conversation on Wednesday took place just after stock exchanges opened at 9:30 a.m. New York time. Less than two hours later, the Fed startled markets by announcing a half-percentage point cut in overnight borrowing costs, bringing the federal funds rate to 4.50 percent. The timing was reminiscent of another call.
``We also spoke a day before the January rate cut,'' said Kalinowski, referring to another surprise half percentage point rate cut on January 3.
``They watch earnings very closely,'' said the analyst, who's been the Fed's regular contact at First Call for two years. ``They often request custom reports on the trends -- 'What's this doing, what's that doing?' It's a small part of their overall decision, but it's very thorough.''
Currently, the 83 tech companies in the S&P 500 are expected to see earnings growth slide by 40 and 45 percent in the first and second quarter, respectively. Last year, analysts were expecting tech comp
Earnings of companies in the S&P 500 are expected to shrink 7.8 percent overall in the first quarter, and fall 2 percent for the full year, according to First Call.
Kalinowski said he won't speculate on whether the timing of a Fed call could indicate a possible rate cut.
``I really can't speculate, and I won't, as to when I know something is out of place,'' he said. Kalinowski said he heartily approves of how the Fed has handled the economic slowdown and the timing of its four rate cuts so far this year.
``They're doing a fantastic job staying ahead of the curve,'' Kalinowski said. |
