QUOTE OF THE CENTURY
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"consumers "have retained enough confidence to make long-term commitments."
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cbs.marketwatch.com
Hey Alan, three weeks is a long time
Lots could happen before next Fed interest rate cut
By David Callaway, CBS MarketWatch
Last Update: 1:24 AM ET Mar 1, 2001
SAN FRANCISCO (CBS.MW) - Three weeks is a long time.
The Dow Jones Industrial Average (INDU: news, msgs, alerts) fell more than
450 points in the last three weeks. The Nasdaq also fell about 450, a
whopping 17 percent for the tech-heavy index. It's now at levels not seen
since the end of 1998. More than 50,000 layoffs have been announced in the
last three weeks.
And yet, Fed chief Alan Greenspan indicates the central bank probably won't
cut interest rates before it holds its next Federal Open Market Committee
meeting on March 20.
Greenspan said that while consumer confidence has weakened, consumers
"have retained enough confidence to make long-term commitments."
Retained confidence? Has he seen the consumer confidence index chart
lately. It looks like someone leaped off a diving board.
Look at all those tech stocks at or near 52-week lows. Cisco, Oracle, Sun
Micro, Hewlett-Packard. Remember Yahoo (YHOO: news, msgs, alerts) ? It
wasn't long ago that people were calling it a screaming buy because it
dipped under 100. Three weeks ago it was at 33. Wednesday it closed at
23.81.
Now, maybe the old "Maestro" was simply giving us all a head fake. You
know how the Fed hates to be predictable. It can't let the markets rule its
behavior.
Another intermeeting rate cut now would look like the Fed is simply following
the markets, rather than leading. And what if it didn't work? Then the Fed has
lost its power altogether, an ominous scenario global investors don't even
want to think about.
It's true that it will take more than
just lower interest rates to bust us
out of this recessionary funk. It will
take more than a tax cut. A
catalyst is needed, as I've said.
And every day that goes by without
one, the Nasdaq slips closer
toward 2,000.
The money is there. Investors
would love to buy Cisco at 24, or
Intel at 28. Or even Yahoo, maybe.
But having cautiously entered back into the fray in January and watching a
third of their new investments get savagely wiped out in February, no one is
ready to stick their neck out again.
The term "Nikkei" sputters from the lips of the more nervous types. That's the
Japanese index that fell below 13,000 on Wednesday to a 15-year low. In
1989, the Nikkei topped out above 39,000. But it plunged soon after and has
never come back.
If ever there was a case to make that lower interest rates don't work, it's in
Japan. After the market closed, the Japanese government lowered its
discount rate to 0.25 percent and its overnight call rate to 0.15 percent. You
can't go much lower than that. And still, nothing.
Of course, our economic situation isn't nearly as dire as it is in Japan.
Nobody is predicting a generation-long decline in stocks -- yet. But some
strategists are now saying it could be two or three years before this bear
market plays itself out.
I don't think so. We may go below 2,000 in the Nasdaq before this is all over,
but by the second half of this year we will be higher than in January. A tax
cut and more rate cuts won't do it alone, but they will be a good start.
President Bush is definitely doing his part. But Greenspan is walking a very
delicate line. If he doesn't cut rates aggressively - such as from 5.5 percent
to 5 percent on the Fed funds rate - and he is wrong about the depth of the
economy's problems, then he will have to take even stronger steps come
April or May.
And if you think a lot of damage can be done in three weeks, you won't have
seen anything yet.
David Callaway is executive editor of CBS.MarketWatch.com. |
