Investors Worldwide Look to Fed for Rate Cut
Nervous investors worldwide are looking to the Federal Reserve for help Tuesday after stocks last week suffered one of their worst routs in a decade.
Amid deepening losses on Wall Street and abroad, there is little question Fed policymakers will cut interest rates for a third time this year in the name of shoring up the economy. The only issue, experts say, is how large a cut the central bank will make.
Analysts said today’s stock market action could influence Fed Chairman Alan Greenspan and other Fed members. A continuing plunge in key indexes, several of which sank to two-year lows Friday, could put more pressure on the Fed to slash rates by 0.75 point rather than by a smaller amount.
Until last week, the Fed had been expected to cut its key short-term rate, now 5.5%, by half a point. But dramatic declines in global equity markets last week--including the 821-point, 7.7% drop in the Dow Jones industrial average, the biggest weekly loss since 1989--left some analysts warning that a half-point cut could trigger a new round of selling by dejected investors.
“I think they have to be a little concerned about a global financial meltdown,” Schwab Washington Research Group managing director Greg Valliere said.
A 0.75-point rate cut, he said, “might finally provide a signal to the markets that the Fed is no longer behind the curve” in terms of halting the decline in the economy and in the markets. “There’s a lot of anger among professional investors that the Fed has botched this.”
A Newsweek magazine poll issued Saturday showed that 71% of Americans think a recession is on the way, up from 54% who thought so in December.
Nearly 70% of respondents said they are less likely to make a major purchase over the next year because of concern about the economy and their jobs.
Meanwhile, the Bank of Japan today was expected to announce a further easing of monetary policy, most likely by boosting the nation’s money supply. The net effect of the expected move, experts said, would be to push the bank’s benchmark short-term interest rate close to zero from the current 0.15%--a de facto return to the “free-money” policy the bank abandoned last year amid hopes the economy was recovering.
Japan’s Nikkei stock index fell to 16-year lows last week on fears that the economy would sink back into recession. What’s more, worries about potential mass insolvencies among Japanese banks and the shock effect that could have worldwide helped spark the dive in European and U.S. stocks last week.
But today, the Nikkei index was up 35 points to 12,267 in afternoon trading.
The gains may have been tied to rumors that Japan and the United States would agree to push the yen lower to help boost Japanese exports. Prime Minister Yoshiro Mori will meet President Bush in Washington today, and one of the topics expected to be discussed is how to rejuvenate Japan’s economy.
Despite denials from Japanese officials early today about a plan to depress the yen, the currency fell to a 22-month low of 123.22 yen per dollar in Tokyo from 122.82 in New York on Friday. A weaker yen makes Japanese exports cheaper abroad.
On Wall Street, where the Dow sank 2.1% to 9,823.41 on Friday and the Nasdaq composite index slid 2.6% to 1,890.91, many analysts see the Fed as the only hope for halting the latest wave of selling.
The weakened economy has left investors expecting mostly bad news when companies begin reporting first-quarter earnings in about three weeks. Many companies have announced that results will be depressed, but warnings could multiply this week.
Against that backdrop and fears that sinking consumer and investor confidence could turn a slowdown into a recession, the Fed should act forcefully, many analysts said. “The Fed has to shake things up,” said Bernie Jensen, head of government trading at Fuji Securities Inc.
In a Reuters poll taken Friday, 12 of the 25 firms that are primary dealers of Treasury bonds said they expected the Fed’s policy-setting Federal Open Market Committee to cut rates by 0.75 point Tuesday. The remaining 13 expected the Fed to stick with a 0.50-point cut.
A 0.75-point cut would drop the Fed’s target for the federal funds rate, the overnight loan rate among banks, to 4.75%. That was the target level in June 1999, when the Fed began to boost rates to slow the economy.
But the Fed has never lowered that rate by more than 0.50 point in the 18 years since the central bank began targeting rates as a way to fine-tune the economy.
Some analysts said cutting rates by three-quarters of a point would risk leaving the impression that Fed policymakers were spooked by the evident downturn. That could make matters worse.
“If they go 0.75, there will be some people who will be alarmed by that, who will think the economy is in worse condition than they thought it was,” said Douglas Lee, president of Economics from Washington, a consulting firm.
“The economic data over the past six weeks have actually been pretty good,” Lee said. “The Fed’s primary job is not to manage the stock market. It’s to manage the economy, and the stock market is really secondary to that.”
Karina Mayer, managing director at International Strategy and Investment Group, said that if the Fed doesn’t cut rates by 0.75 point, it almost certainly will include strong language in its post-meeting statement suggesting that it probably will cut rates again, potentially before its next scheduled meeting May 15.
Lawmakers weighed in Sunday with calls for rate cuts, warning that consumer confidence has been shaken by stocks’ woes.
“It would be inconceivable to me if the Federal Reserve did not respond this week by lowering interest rates,” Sen. Robert Torricelli (D-N.J.) said on “Fox News Sunday.” “It would be outrageous. And I trust the Fed has that message.”
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Reuters and Bloomberg News were used in compiling this report.
