A bit of an insight as to the last .50 Fed cut
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Back to Start of Article WASHINGTON When Federal Reserve Board policymakers surprise financial markets with an unexpected change in interest rates, investors and analysts often wonder, "What do they know that we don't?" Usually, the answer is nothing.
.
But when the Fed caught the markets off guard April 18 with a half-percentage-point reduction in short-term interest rates, the chairman, Alan Greenspan, and other central bank officials did have some vital, privately gathered information that persuaded them that an immediate rate cut was needed.
.
Mr. Greenspan had expressed concern earlier that businesses, worried about falling profits in a sluggish economy, might cut back their spending for new plants and equipment so much that they would prolong the slump and forestall an eventual rebound in growth. Anecdotal evidence reaching the Fed suggested that could be the case.
.
To get a better reading, Mr. Greenspan had for weeks directed Fed staff to closely track company earnings announcements and business executives' comments about their plans for such capital spending. Some staff members also had been working the phones, asking individual companies specific questions about their spending plans.
.
What Fed officials and the staff found by early April was a disturbingly sour attitude among corporate executives that suggested many of them were hunkering down, concentrating on cutting costs and slashing investment plans. The policymakers concluded that quick Fed action was needed to try to break that psychological mind-set lest it undermine the gradual pickup in economic growth later this year that many Fed officials expect. And the officials decided they could not wait until their next regular meeting, scheduled for May 15.
.
So on April 18, Mr. Greenspan convened an 8:30 a.m. conference-call meeting of the Federal Open Market Committee, the Fed's top policy-making group. That group lowered the Fed's target for overnight interest rates by a half-percentage point to 4.5 percent. In a separate action, the Fed board reduced the discount rate, the interest rate financial institutions pay when they borrow directly from one of the Fed's 12 regional reserve banks, also by a half point.
.
This picture emerges from interviews with sources who spoke on the condition of anonymity, Wall Street analysts and public comments by several Fed officials.
.
The Fed's moves surprised financial markets, for two reasons.
.
First, the most recently published economic statistics suggested that, while the U.S. economy was still weak, some sectors had begun to improve. Some private forecasters had even begun to revise their predictions for growth upward modestly.
.
Second, several presidents of the regional Fed banks had made recent speeches noting the signs of improvement, which the markets interpreted as suggesting that urgent action on rates was not needed.
.
For some investors and analysts, the clincher came April 10 from William Poole, president of the St. Louis Federal Reserve Bank. Mr. Poole told reporters that the Fed's target for overnight rates should be changed only at the committee's eight regularly scheduled meetings each year, except in "compelling" circumstances.
.
"There are compelling times when quick action is necessary, but this is not one of them," Mr. Poole asserted.
.
A few weeks earlier, at its March 20 meeting, the committee had cut its rate target by a half point and hinted clearly that it might cut rates again if necessary before its next meeting in May. In the statement, the committee said that, given the weak and uncertain economic outlook, "when the economic situation could be evolving rapidly, the Federal Reserve will need to monitor developments closely."
.
The committee had used similar wording in an announcement after its mid-December meeting, intending to signal that it would consider making a rate cut before its next regular meeting. However, most market participants did not pick up that signal and were therefore very surprised when the Fed lowered its rate target by a half point on Jan. 3.
.
The reappearance of that language in March initially convinced many investors and analysts that another reduction was likely during the long eight-week period between the March and May meetings. But as April wore on, and the tone of new economic data improved a bit, and some Fed officials suggested no Fed action was in the offering, market expectations for a rate cut evaporated.
.
When the Fed moved on April 18, some analysts concluded that Fed officials must have decided that a rate cut would have a greater impact if it came as a surprise to investors and business executives. If that were the case, then the regional Fed bank presidents' remarks must have been part of a coordinated plan intended to mislead market participants, the analysts said.
.
To most Fed officials, the notion of coordinating statements of all the policymakers is almost laughable. Public statements by one policymaker or another often leave others in the group shaking their heads. That clearly was the case when Mr. Poole so specifically ruled out a between-meetings move.
.
There has been no public indication of whether there were any dissents registered during the April 18 telephone conference call. The minutes of that meeting, along with those from the preceding regular committee session, on March 20, will be released two days after the upcoming May 15 meeting.
.
Now, of course, attention has turned to what the Fed will do May 15.
.
Most analysts expect a further reduction in the target for overnight rates, by either a quarter of a point or a half point. The latter would bring the rate target down to 4 percent, its lowest in seven years. Some analysts say the Fed will stop at 4 percent, whether it gets there in one step or two. WASHINGTON When Federal Reserve Board policymakers surprise financial markets with an unexpected change in interest rates, investors and analysts often wonder, "What do they know that we don't?" Usually, the answer is nothing.
.
But when the Fed caught the markets off guard April 18 with a half-percentage-point reduction in short-term interest rates, the chairman, Alan Greenspan, and other central bank officials did have some vital, privately gathered information that persuaded them that an immediate rate cut was needed.
.
Mr. Greenspan had expressed concern earlier that businesses, worried about falling profits in a sluggish economy, might cut back their spending for new plants and equipment so much that they would prolong the slump and forestall an eventual rebound in growth. Anecdotal evidence reaching the Fed suggested that could be the case.
.
To get a better reading, Mr. Greenspan had for weeks directed Fed staff to closely track company earnings announcements and business executives' comments about their plans for such capital spending. Some staff members also had been working the phones, asking individual companies specific questions about their spending plans.
.
What Fed officials and the staff found by early April was a disturbingly sour attitude among corporate executives that suggested many of them were hunkering down, concentrating on cutting costs and slashing investment plans. The policymakers concluded that quick Fed action was needed to try to break that psychological mind-set lest it undermine the gradual pickup in economic growth later this year that many Fed officials expect. And the officials decided they could not wait until their next regular meeting, scheduled for May 15.
.
So on April 18, Mr. Greenspan convened an 8:30 a.m. conference-call meeting of the Federal Open Market Committee, the Fed's top policy-making group. That group lowered the Fed's target for overnight interest rates by a half-percentage point to 4.5 percent. In a separate action, the Fed board reduced the discount rate, the interest rate financial institutions pay when they borrow directly from one of the Fed's 12 regional reserve banks, also by a half point.
.
This picture emerges from interviews with sources who spoke on the condition of anonymity, Wall Street analysts and public comments by several Fed officials.
.
The Fed's moves surprised financial markets, for two reasons.
.
First, the most recently published economic statistics suggested that, while the U.S. economy was still weak, some sectors had begun to improve. Some private forecasters had even begun to revise their predictions for growth upward modestly.
.
Second, several presidents of the regional Fed banks had made recent speeches noting the signs of improvement, which the markets interpreted as suggesting that urgent action on rates was not needed.
.
For some investors and analysts, the clincher came April 10 from William Poole, president of the St. Louis Federal Reserve Bank. Mr. Poole told reporters that the Fed's target for overnight rates should be changed only at the committee's eight regularly scheduled meetings each year, except in "compelling" circumstances.
.
"There are compelling times when quick action is necessary, but this is not one of them," Mr. Poole asserted.
.
A few weeks earlier, at its March 20 meeting, the committee had cut its rate target by a half point and hinted clearly that it might cut rates again if necessary before its next meeting in May. In the statement, the committee said that, given the weak and uncertain economic outlook, "when the economic situation could be evolving rapidly, the Federal Reserve will need to monitor developments closely."
.
The committee had used similar wording in an announcement after its mid-December meeting, intending to signal that it would consider making a rate cut before its next regular meeting. However, most market participants did not pick up that signal and were therefore very surprised when the Fed lowered its rate target by a half point on Jan. 3.
.
The reappearance of that language in March initially convinced many investors and analysts that another reduction was likely during the long eight-week period between the March and May meetings. But as April wore on, and the tone of new economic data improved a bit, and some Fed officials suggested no Fed action was in the offering, market expectations for a rate cut evaporated.
.
When the Fed moved on April 18, some analysts concluded that Fed officials must have decided that a rate cut would have a greater impact if it came as a surprise to investors and business executives. If that were the case, then the regional Fed bank presidents' remarks must have been part of a coordinated plan intended to mislead market participants, the analysts said.
.
To most Fed officials, the notion of coordinating statements of all the policymakers is almost laughable. Public statements by one policymaker or another often leave others in the group shaking their heads. That clearly was the case when Mr. Poole so specifically ruled out a between-meetings move.
.
There has been no public indication of whether there were any dissents registered during the April 18 telephone conference call. The minutes of that meeting, along with those from the preceding regular committee session, on March 20, will be released two days after the upcoming May 15 meeting.
.
Now, of course, attention has turned to what the Fed will do May 15.
.
Most analysts expect a further reduction in the target for overnight rates, by either a quarter of a point or a half point. The latter would bring the rate target down to 4 percent, its lowest in seven years. Some analysts say the Fed will stop at 4 percent, whether it gets there in one step or two. WASHINGTON When Federal Reserve Board policymakers surprise financial markets with an unexpected change in interest rates, investors and analysts often wonder, "What do they know that we don't?" Usually, the answer is nothing.
.
But when the Fed caught the markets off guard April 18 with a half-percentage-point reduction in short-term interest rates, the chairman, Alan Greenspan, and other central bank officials did have some vital, privately gathered information that persuaded them that an immediate rate cut was needed.
.
Mr. Greenspan had expressed concern earlier that businesses, worried about falling profits in a sluggish economy, might cut back their spending for new plants and equipment so much that they would prolong the slump and forestall an eventual rebound in growth. Anecdotal evidence reaching the Fed suggested that could be the case.
.
To get a better reading, Mr. Greenspan had for weeks directed Fed staff to closely track company earnings announcements and business executives' comments about their plans for such capital spending. Some staff members also had been working the phones, asking individual companies specific questions about their spending plans.
.
What Fed officials and the staff found by early April was a disturbingly sour attitude among corporate executives that suggested many of them were hunkering down, concentrating on cutting costs and slashing investment plans. The policymakers concluded that quick Fed action was needed to try to break that psychological mind-set lest it undermine the gradual pickup in economic growth later this year that many Fed officials expect. And the officials decided they could not wait until their next regular meeting, scheduled for May 15.
.
So on April 18, Mr. Greenspan convened an 8:30 a.m. conference-call meeting of the Federal Open Market Committee, the Fed's top policy-making group. That group lowered the Fed's target for overnight interest rates by a half-percentage point to 4.5 percent. In a separate action, the Fed board reduced the discount rate, the interest rate financial institutions pay when they borrow directly from one of the Fed's 12 regional reserve banks, also by a half point.
.
This picture emerges from interviews with sources who spoke on the condition of anonymity, Wall Street analysts and public comments by several Fed officials.
.
The Fed's moves surprised financial markets, for two reasons.
.
First, the most recently published economic statistics suggested that, while the U.S. economy was still weak, some sectors had begun to improve. Some private forecasters had even begun to revise their predictions for growth upward modestly.
.
Second, several presidents of the regional Fed banks had made recent speeches noting the signs of improvement, which the markets interpreted as suggesting that urgent action on rates was not needed.
.
For some investors and analysts, the clincher came April 10 from William Poole, president of the St. Louis Federal Reserve Bank. Mr. Poole told reporters that the Fed's target for overnight rates should be changed only at the committee's eight regularly scheduled meetings each year, except in "compelling" circumstances.
.
"There are compelling times when quick action is necessary, but this is not one of them," Mr. Poole asserted.
.
A few weeks earlier, at its March 20 meeting, the committee had cut its rate target by a half point and hinted clearly that it might cut rates again if necessary before its next meeting in May. In the statement, the committee said that, given the weak and uncertain economic outlook, "when the economic situation could be evolving rapidly, the Federal Reserve will need to monitor developments closely."
.
The committee had used similar wording in an announcement after its mid-December meeting, intending to signal that it would consider making a rate cut before its next regular meeting. However, most market participants did not pick up that signal and were therefore very surprised when the Fed lowered its rate target by a half point on Jan. 3.
.
The reappearance of that language in March initially convinced many investors and analysts that another reduction was likely during the long eight-week period between the March and May meetings. But as April wore on, and the tone of new economic data improved a bit, and some Fed officials suggested no Fed action was in the offering, market expectations for a rate cut evaporated.
.
When the Fed moved on April 18, some analysts concluded that Fed officials must have decided that a rate cut would have a greater impact if it came as a surprise to investors and business executives. If that were the case, then the regional Fed bank presidents' remarks must have been part of a coordinated plan intended to mislead market participants, the analysts said.
.
To most Fed officials, the notion of coordinating statements of all the policymakers is almost laughable. Public statements by one policymaker or another often leave others in the group shaking their heads. That clearly was the case when Mr. Poole so specifically ruled out a between-meetings move.
.
There has been no public indication of whether there were any dissents registered during the April 18 telephone conference call. The minutes of that meeting, along with those from the preceding regular committee session, on March 20, will be released two days after the upcoming May 15 meeting.
.
Now, of course, attention has turned to what the Fed will do May 15.
.
Most analysts expect a further reduction in the target for overnight rates, by either a quarter of a point or a half point. The latter would bring the rate target down to 4 percent, its lowest in seven years. Some analysts say the Fed will stop at 4 percent, whether it gets there in one step or two. |
