Will this latest FED cut be enough - or will this be another CTR??? I read these comments as a 'mixed message' .
How weak is this economy? I think we need more than this belated rate-cut to spur-on consumer (& capital) spending............ I don't think the FED's recent 'jawboning-the-economy-to-recover' comments are a sufficient catalyst.
04/18 16:57
U.S. Economy: Fed Cuts Lending Rate in Surprise
Move (Update2)
By John Cranford
Washington, April 18 (Bloomberg) -- Federal Reserve policy makers reduced their
benchmark interest rate a half-percentage point today in a surprise decision
aimed at reversing declines in business investment and profits.
Stocks soared after Fed Chairman Alan Greenspan and his colleagues on the
Open Market Committee cut the overnight bank lending rate to 4.5 percent, the
lowest in more than six years. The Nasdaq Composite Index rose 8.1 percent to
its highest since March 8. The Dow Jones Industrial Average and the Standard
and Poor's Index of 500 stocks both gained almost 4 percent.
The rate reduction, the fourth this year, ``ought to provide enough confidence to
business and investors to steady the economy soon,'' said John Lonski, chief
economist at Moody's Investment Service in New York.
More than 870 companies, a record, gave investors a heads-up that earnings in
the first three months of the year would miss expectations, according to First
Call/Thomson Financial. Cisco Systems Inc., the top maker of computer
networking equipment, said this week its revenue in the quarter ending April 28
will fall as much as 30 percent.
``The persistent erosion in current and expected profitability, in combination with
rising uncertainty about the business outlook, seems poised to dampen capital
spending,'' the Fed said in a statement. That, plus reduced spending as
consumers' stock holdings dwindle, ``threatens to keep the pace of economic
activity unacceptably weak,'' the Fed said.
2 Percentage Points
Today's rate cut, which put the overnight rate 2 percentage points lower than it
was at the first of the year, is expected to result in lower borrowing costs for
consumers and businesses. Bank of America Corp., J.P. Morgan Chase & Co.,
and other large U.S. banks trimmed their prime lending rates a half point to 7.5
percent. The prime rate is offered to banks' best customers and is the
benchmark to which many consumer loans are pegged.
Companies ``need to invest in order to keep the economy growing,'' said David
Orr, chief economist at First Union Corp. in Charlotte. ``CEOs were still negative
about the business outlook, particularly their profitability,'' Orr said. ``They're
saying to CEO's, `We are on your side.' ''
Economic growth slowed in the final three months of last year to a 1 percent
annual rate, the lowest in 5 1/2 years. Growth probably was about that pace in
the first quarter, Fed officials and economists have said. Even with the slowdown,
interest rates on corporate bonds have been rising relative to Treasury yields.
That may have helped prompt the Fed to act, Lonski said.
``What is intolerable is a rise by private sector borrowing costs amid a declining
economy,'' he said.
Morning Call
Today's decision was made in an 8:30 a.m. conference call that lasted less than
an hour. It was the second time this year central bankers reduced rates in an
impromptu phone call weeks before their next scheduled meeting. The FOMC
next meets May 15.
The biggest cloud over the economy has been the decline in stocks. Before
today, the Nasdaq was down 22 percent since the first of the year, after falling 39
percent last year, while the Dow had dropped more than 5 percent.
The Dow rose 399 points, or 3.9 percent, to close at 1065.83. The Nasdaq
climbed 156 points, or 8.1 percent, to close at 2079.44. The S&P rose 46 points,
or 3.9 percent, to close at 1238.16. The Treasury's 10-year note rose 5/8 point,
pushing down its yield 8 basis points to 5.14 percent.
``The immediate effects mean less interest expense for the remainder of the
year, which gives us even more of a hedge toward our earnings,'' said Dennis
Kozlowski, chairman and chief executive officer for Tyco International Ltd., the
biggest maker of security systems and electronic connectors. Tyco's shares
rose 7.7 percent today.
Rate Increases Reversed
Today's action more than reverses the six rate increases approved by the Fed
between June 1999 and May 2000. The last time the overnight rate was as low
as 4.5 percent was August 1994.
The Fed's Board of Governors also voted to cut the discount rate on loans to
banks from the Fed system by a half-percentage point to 4 percent. Although few
banks borrow directly from the Fed to meet their cash reserve requirements, the
central bank generally keeps the discount rate within a half percentage point of
the overnight bank rate.
Investors were betting the central bank might reduce rates by at least a quarter
percentage point at their May meeting, though probably not before. The yield on
the fed funds futures contract for April, based on the average cost of overnight
loans for this month, was about 5 percent before the announcement. The May fed
funds future had a yield of 4.85 percent, 15 basis points below the previous
target.
After today's announcement, the June fed funds futures had an implied yield of
4.22 percent, suggesting investors expect an additional quarter-point cut in May.
Couldn't Wait
With evidence of further economic slowing, Fed officials decided they couldn't
wait a month before acting.
U.S. payrolls shrank by 86,000 in March, the first decline in seven months, and
the unemployment rate rose to 4.3 percent, the highest in more than 1 1/2 years
The decline in payrolls was the largest since November 1991, when the economy
was emerging from the last recession.
U.S. retail sales declined in March after stagnating the month before. Sales at
retailers fell 0.2 percent in March, the Commerce Department said last week, as
business slowed at auto dealers, building supply outlets and apparel stores.
Sears, Roebuck & Co., Federated Department Stores Inc. and Limited Inc. were
among chain stores reporting declining sales last month.
The government reported today that imports fell a record 4.4 percent in February
-- a further sign consumers and businesses are spending less.
There also are signs segments of the economy are healthy and weaker parts
may gain strength. ``A significant reduction in excess inventories seems well
advanced. Consumption and housing expenditures have held up reasonably well,
though activity in these areas has flattened recently,'' the Fed said in today's
statement.
In recent comments, Fed officials had said they expect the economy to rebound
in the second half of the year, aided by the three rate reductions already in place.
While Philadelphia Fed Bank President Anthony Santomero declined to
comment today on the Fed's action, he referred to ``the recovery that is just
around the corner.''
Two weeks ago, Chicago Fed Bank President Michael Moskow said, ``We're
going to see some rough spots, but we're optimistic about the long term.''
And San Francisco Fed Bank President Robert Parry said earlier this month,
``Given all the negative news about the economy recently, I may need to remind
you that the data so far seem to indicate that the U.S. economy is still
expanding, if only very slowly.'' |
