Stocks Surge as Greenspan Hints Fed May Cut Rates
Federal Reserve Chairman Alan Greenspan said Tuesday that the U.S. economy has slowed “appreciably” and suggested that the central bank may be preparing to reverse course and begin cutting interest rates to keep growth from sliding further.
Greenspan’s comments, his first public acknowledgment that a broad slowdown of the economy is underway, contained hints of concern that the process may have gone too far.
“In an economy that already has lost some momentum,” he told a conference of bankers in New York, “one must remain alert to the possibility that greater caution and weakening asset values in financial markets could signal or precipitate an excessive softening in household and business spending.”
The Fed chairman’s remarks, combined with mounting evidence that Republican George W. Bush will finally clinch the presidency, set off a buying frenzy on Wall Street, especially in the technology sector.
The deeply depressed Nasdaq composite index scored the largest one-day gain in its 29-year history, surging 274.05 points, or 10.5%, to 2889.80. Other market measures also jumped, although not as dramatically.
But behind the burst of investor enthusiasm, analysts found some disturbing elements in Greenspan’s remarks.
“He is running a bit scared; the economy is slowing faster than he had anticipated,” said Sung Won Sohn, executive vice president and chief economist of Wells Fargo & Co.
Greenspan offered the by-now-familiar explanation for the nation’s extraordinary economic performance of recent years. New technology, he said, has allowed businesses to boost productivity and let the economy expand faster than usual.
And he defended the Fed’s decision to slow growth to a less inflation-prone pace by raising interest rates six times between mid-1999 and the middle of this year.
But the Fed chairman laced his account with warnings that investors and lenders may be overreacting to recent signs of slowdown in ways that could make matters worse. In the process, some analysts said, he engaged in a kind of persuasion that appeared, at times, to contradict his own policy positions.
For example, Greenspan seemed to try to talk stock investors out of what he apparently views as their excessive pessimism, suggesting they focus less on recent reductions in quarterly profit projections and more on long-term forecasts, which remain sunny.
“He would never admit he was jawboning the market, but he has to now that stocks are so widely owned and such a focus of attention,” said William Cheney, chiefeconomist at John Hancock Financial Services in Boston.
Analysts found Greenspan’s attempt to pump up stock prices ironic. Until now, he has tried to talk prices down, as in a 1996 speech in which he memorably accused investors of “irrational exuberance.” His efforts were a miserable failure; the market almost doubled in value in the years that followed.
Perhaps as surprising in Tuesday’s speech was Greenspan’s apparent effort to suggest that the nation’s banks should continue lending to credit-worthy borrowers, even if that means disregarding the Fed’s own bank supervisors, who have recently warned about too aggressive lending.
Although caution is important, the Fed chairman told his audience, “both bankers and their supervisors should . . . guard against allowing the pendulum to swing too far the other way by adopting policy stances that cut off credit to borrowers with credible prospects.”
In trying to convince America’s chief economic players that slowdown does not necessarily spell recession, Greenspan is swimming against a tide of recent government reports that show the nation’s near-decade-long boom is sagging.
The latest evidence came Tuesday, when the Commerce Department reported that orders placed with U.S. manufacturers tumbled 3.3% in October, its weakest showing in three months. In the last week alone, separate reports have shown that auto and retail sales are weakening, consumer confidence is slipping and economic growth during the most recent July-September quarter was a weaker-than-expected 2.4%, or less than half the previous quarter’s.
Despite such evidence, analysts said the Fed is unlikely to cut interest rates immediately in order to rekindle growth. Instead, they said, the central bank’s policymaking body, the Federal Open Market Committee, probably will drop its so-called tightening bias when it meets Dec. 19 and replace it with a “neutral” bias, which would set the stage for actual rate reductions early next year.
But the mere prospect of a rate cut was enough to send the stock market into a delirium. Besides the record jump in the tech-heavy Nasdaq, the Standard & Poor’s 500-stock index gained 51.57 points, or 3.9%, to close at 1376.54. The Dow Jones industrial average rose 338.62 points, or 3.2%, to close at 10,898.72, its biggest gain since mid-March.
In the bond market, the price of a 10-year Treasury bond rose a full point. The benchmark bond’s yield or market interest rate, which moves in the opposite direction of its price, fell from Monday’s close of 5.55% to 5.43%, its lowest level since May 1999.
Despite Greenspan’s worries, analysts said the Fed is unlikely to take any but modest action until the unemployment rate begins rising from its three-decade low of 3.9%. Central bank policymakers believe that only an increase can relieve upward pressure on wages and thus prices, which could set off a new round of inflation.
Policymakers will get their next snapshot of the nation’s labor market Friday, when the November unemployment rate is released.
(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)
Factory Orders
New orders, in billions of dollars, seasonally adjusted:
October: $373.90
Source: Commerce Department
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* NASDAQ LEAP
The battered index leaped a record-shattering 10.5%. C1
* BOND RALLY
Fed chief triggers rally in fixed-income markets. C4
