Why The Federal Reserve Reduced Interest Rates
SUSIE GHARIB: Wall Street wraps up the week with a bang. The Dow rallies again, pushing its biggest weekly gain in history, up 6 1/2 percent. But the day after that welcome news of a cut in interest rates, many investors are worried and asking whether there's some bad news lurking on the horizon. Scott Gurvey canvassed Wall Street pros for some answers.
SCOTT GURVEY, NIGHTLY BUSINESS REPORT, CORRESPONDENT: It was already the day after, but Wall Street spent it trying to figure out why the Federal Reserve lowered interest rates just 17 days after its last cut. The Fed had a news blackout on, and will not explain beyond yesterday's statement citing growing caution by lenders and unsettled conditions. But Fed watchers say Chairman Alan Greenspan got new, nonpublic information in recent days that led to the second cut. They say the information indicates more trouble at hedge funds, and significant losses at major banks. The Fed action on interest rates relieves pressure on the funds and can increase bank profits.
ROBERT BRUSCA, CHIEF ECONOMIST, NIKKO SECURITIES: I think this is aimed at shoring up U.S. banks and financial institutions. I can't believe that this is something that is aimed at the economy, which anybody in their right mind would think needs to slow down to some extent.
GURVEY: Earlier this week, Bank of America surprised Wall Street with a profit shortfall due to write
downs, including one for $1 billion loan to a hedge fund. Many believe the Fed expects more of these surprises next week, when other major banks report. Rumors today focused on Bankers Trust, alleging that the bank had been forced to borrow at the Fed's discount window in recent days. Bankers Trust called the charges absolutely false and said the firm is in sound financial condition. Whatever has or has not happened, Mr. Greenspan would know.
JAMES MCDERMOTT, PRESIDENT, KEEFE, BRUYETTE & WOODS: He also sees, you know, who might be at the discount window and who might be borrowing, who might be having difficulty funding their operations. There are a lot of rumors going on out there right now about certain commercial banks and you know, just a very uncertain time from that standpoint.
GURVEY: But not everyone sees a story behind the story. Some think conditions that are well known led to the cut.
MICHELLE LAUGHLIN, TREASURY MARKET STRATEGIST, PRUDENTIAL
SECURITIES: I think we're all well aware that in the capital markets, liquidity conditions are, you know, deteriorating. And that's why I think that the move was justified. The Fed doesn't have to be, doesn't have to necessarily know something. The current conditions alone I think were enough to justify a move.
GURVEY: Earnings reports are expected next week from Citigroup, Chase Manhattan, JP Morgan, Bank of New York (NYSE:BK), Bankers Trust and others. Scott Gurvey, NIGHTLY BUSINESS REPORT, New York.
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