Updated from 3:50 p.m. EST
Back in black!
After spending much of the last week-and-a-half floating higher on light volume, blue-chip stocks closed in the green -- but far off session highs -- after the
Federal Reserve's decision to cut the
federal funds rate by 50 basis points. The move was widely anticipated, with the
fed funds futures earlier in the day having priced in a better-than-100% chance that the Fed would slash rates.
Traders, anxious and unwilling to wade into an uncertain market ahead of the
Federal Open Market Committee were churning before the decision, with the
Dow Jones Industrial Average jumping around in positive territory. After the cut, stocks started to fall. A few minutes later, the major indices were higher than where they stood before the decision and then fell back again. The Dow recovered some, but the Nasdaq ended solidly in the red.
The Dow, which was up about 33 points ahead of the Fed's announcement, finished up 6 to 10,887. The
Nasdaq Composite Index, up 16 prior to the release, finished down 65 to 2773.
"Consumer and business confidence has eroded further, exacerbated by rising energy costs that continue to drain consumer purchasing power and press on business profit margins. Partly as a consequence, retail sales and business spending on capital equipment have weakened appreciably," the Fed said in its release at 2:15 p.m. EST. "Taken together, and with inflation contained, these circumstances have called for a rapid and forceful response of monetary policy. The longer-term advances in technology and accompanying gains in productivity, however, exhibit few signs of abating and these gains, along with the lower interest rates, should support growth of the economy over time."
The mood was uncertain on Wall Street, as the subtle run-up prior to the Fed's action turned into a seesaw of price movements. Stocks, having already fully priced in the 50 basis point cut, could find little upside room.
There has been a weakly supported rally that sent the Comp up 24% since Jan. 2, when the Fed cut rates by 50 basis points. That, added to today's move, makes this the first time since 1984 that the Fed has made such a great move in such a short span.
tracks the Fed's
The Fed action drops the short-term lending rate to 5.5%, a 1% drop since the first day of 2001. The cost of borrowing money is now cheaper, which encourages corporations, communities and individuals to buy things, be it cutting-edge technology, municipal improvements or even an addition to the old homestead. That is good for business, or so the thinking goes.
In the weeks since the last rate cut, Alan Greenspan has donned the winter gear, trying to stay warm in the face of a raw jet stream of frosty economic data. And in
testimony on last Thursday, the chair tipped his hand, endorsing tax cuts and telling officials that economic growth flatlined. Just consider the cold hard facts:
- Today, the preliminary estimate of
gross domestic product for the fourth quarter grew 1.4% -- the smallest rise since spring of 1995. That's a drop from last quarter's 2.2% increase and lower than the 1.9% increase that was expected.
consumer confidence fell by the steepest margin since October 1990, when the U.S. was mired in a recession and still listening to M.C. Hammer.
Retail sales fell in both October and November, before posting a pithy 0.1% increase in December -- a sure sign that consumers have stopped pulling out the credit cards at every available minute.
Skyrocketing fuel costs have wreaked havoc on chemical makers, mining companies, airlines, truckers, automakers and the American consumer. Crude oil, trading around $29 a barrel in recent sessions, had an average cost of $32 a barrel in the fourth quarter.
National Association of Purchasing Managers show
manufacturing spending has been shrinking for the past five months. Earnings trouble at
3M (MMM) - Get Report and
Honeywell (HON) - Get Report drive home this point.
unemployment remains at a 30-year low, more than 130,000 layoffs were announced in December, the largest number in at least 8 years, according to
Challenger, Gray & Christmas, an employment research firm. And that figure doesn't even include January's layoffs, with whopping cuts at
DaimlerChrysler (DCX) ,
Amazon.com (AMZN) - Get Report and
J.C. Penney (JCP) - Get Report.
Retail stocks continued to strengthen, as they had prior to release. Within the Dow, both
were providing leadership, helping not only the blue-chips, but the entire industry. Just take a look at the
S&P Retail Index
, which ended with a 4% gain, just as it had for much of the morning.
Within technology, networking and semiconductors ramped higher, though they lost some of their gains as the afternoon wore on. One possible reason: The cheaper money supply will boost information-technology spending, which would go towards networking. Networking companies, in turn, need semiconductors and microchips. The
American Stock Exchange Networking Index
gained 0.2%. Semis were pushed higher by
Banking stocks, which have been on a tear since Thanksgiving as the prospects for deep Fed cuts got better and better, were coughing up some gains. The
Philadelphia Stock Exchange/KBW Bank Index
, which tracks the sector, slumped 1.0%.
Bank of America
were both lower.
Insurers were also trending lower, with financials overall dipping into the red. The
S&P Insurance Index
was off 1.96%, as
fell 3.2% and
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Federal Reserve decided at the conclusion of its latest monetary policy meeting to lower interest rates by half a percentage point. In its ongoing attempt to revive the sagging economy, the
Federal Open Market Committee lowered the
fed funds rate, the interest rate at which banks lend to each other overnight, to 5 1/2%. At the same time, the Board of Governors approved a 50 basis-point reduction in the discount rate to 5%. The discount rate is the rate the Fed charges member banks on short-term loans.
The latest Fed move means that the fed funds rate has been cut by 50 basis points in two consecutive strokes (for a total of 1 full percentage point). The central bank made its previous cut in a surprise intermeeting move on Jan. 3. Today's easing met market expectations, though dire economic data over the past few days had about a third of analysts hoping for a 75-point cut.
Falling consumer confidence was at the forefront of Fed Chairman
Alan Greenspan's concerns, and his team was quick to note that as a basis for their latest decision.
In its press release accompanying the cut, the FOMC noted that "consumer and business confidence has eroded further, exacerbated by rising energy costs that continue to drain purchasing and press on business profit margins." It referred to the domino effect this was having in weakening retail sales and business spending on capital equipment, in turn leading to a sharp cutback in manufacturing production.
Observing that inflation, which has been the reason in the past for raising or steadying rates, remains in control, the central bank asserted that it felt that a "rapid and forceful response of monetary policy" was appropriate.
The committee continues to keep faith that technological advances will be the engine of economic gains and to accompanying gains in productivity over the longer term; moreover, it feels that lower interest rates will encourage this beneficial effect. The FOMC concluded, however, that current "risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future."
This is the first time since 1984 that interest rates have been lowered by a total of 1 percentage point in a single month.
The benchmark 10-year
Treasury note was up 22/32 to 104 17/32, lowering its yield to 5.141%.
gross domestic product
), which measures the change in total output of products and services in the country, grew by 1.4% in the fourth quarter of 2000. This is lower than the rate of 1.9% forecasted by economists in a
poll, and the slowest pace of growth since the second quarter of 1995.
Chicago Purchasing Managers' Index
chart ) dropped to 40.2 in January from 45.2 in the previous month. The prospects were for a drop to 43.2, and the current reading is the lowest since Nov.1982. Expansion of factory activity is considered positive when the gauge is above 50.
New home sales
) shot up more than expected by 13.4% in December to 975,000 units sold, and are at their highest level since Nov.1998. Low mortgage rates account for the raised number, which stands at 90,000 units more than the level economists had been expecting.
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