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Strategies & Market Trends : VOLTAIRE'S PORCH-MODERATED -- Ignore unavailable to you. Want to Upgrade?

To: RR who wrote (56067)	11/7/2002 11:36:33 AM
From: Cactus Jack	Respond to of 65232

RR, Nice discipline with that SPX trade. jpg

To: RR who wrote (56067)	11/7/2002 12:48:10 PM
From: stockman_scott	Respond to of 65232

Fed Cuts By 1/2 Point To 41-Yr. Low In Effort To Shore Up Recovery By Jed Graham Investor's Business Daily Thursday November 7, 10:38 am ET The Federal Reserve delivered a bigger-than-expected dose of economic medicine Wednesday, slashing its key interest rate by 50 basis points to 1.25%, its lowest level since July 1961. The Fed said it acted after recent data confirmed that "greater uncertainty, in part attributable to heightened geopolitical risks, is currently inhibiting spending, production and employment." The aggressive move surprised Wall Street, which had expected a quarter-point cut in the fed funds rate. But perhaps the bigger shock was that the Fed administered its remedy with a shot of optimism by signaling that its work is done. Despite the current problems, the Fed took its patient off the critical list, saying the risks are now balanced between economic weakness and inflation. "Certainly, the Fed will succeed in getting everyone's attention," said Dick Rippe, chief economist at Prudential Securities. "I think the Fed wanted to take a decisive step after considering that some of the problems in the economy were not going away." Markets responded to the strong message. The Dow, S&P 500 and Nasdaq rallied about 1% to their highest levels since late August. Treasuries also rose, with 10-year yields falling to 4.03%. The Right Move By moving to a neutral bias and blaming the "current soft spot" largely on war worries, the Fed didn't trigger any alarms, said Bob Gay, global head of fixed income research at Commerzbank Securities and a former Fed economist. "It's a very shrewd message," he said. "They totally dodged the issue of saying, 'We think the economy is a lot worse off.' " And while Gay doesn't think economic data are weak enough to warrant a rate cut, he says the Fed might have wanted to stay ahead of any Iraq-related economic ripples. Fed policy-makers don't meet again for six weeks. The neutral bias also makes sense, Gay says. The Fed doesn't have conclusive evidence to support a negative view on growth next year, but policy-makers might be thinking Tuesday's Republican sweep and a war with Iraq both mean "more fiscal stimulus next year," Gay said. Not Too Much And in the context of current inflation, Wednesday's rate cut wasn't overly aggressive. Inflation is running at a 1.25% rate, Gay figures, making the real fed funds rate effectively 0%, which is the long-run average. Merrill Lynch Chief Economist Bruce Steinberg, who thinks inflation is a bit higher, puts the inflation-adjusted fed funds rate at -0.5%. That's the level at which real rates bottomed during the 1989-92 easing cycle, he notes. While the Fed's optimism carried the day, the question remains whether the 50-basis-point cut will do much to lift the economy. Auto loans won't get more attractive than 0% and home loan rates won't likely go low enough to set off another refinancing wave, but low rates still can have an impact. "Given that 20% of all existing mortgages in the U.S. have adjustable rates, this will (in time) put more money in people's pockets," wrote Sherry Cooper, global economic strategist at BMO Financial Group. But while lower rates reduce debt service for both the corporate and household sectors, Merrill's Steinberg wrote, "the latest move is no panacea." Low rates will help spur business borrowing "someday," but possibly not until 2004, Gay says. "The biggest driver of business borrowing is expected sales," Gay said. And while companies may report better profits, most have cut 2003 revenue guidance, he notes. biz.yahoo.com