The Federal Reserve, in a move most considered unexpected, cut its benchmark interest rate by another half-point yesterday, to 4.5 percent. (It's the federal funds target rate on overnight loans between banks.) It also cut its discount rate on loans to banks from the Federal Reserve system by a half-point, to 4 percent.
It was the fourth such half-point rate cut since Jan. 1, 2001, and like two of the previous three, it immediately spurred optimism reflected in the stock market. The Dow Jones industrial average gained 399 points yesterday, a nearly 4 percent increase, to finish at 10,615.83. The Nasdaq composite index also jumped, up 156.22 points for the day.
The cut was regarded as reflecting the Fed's increasing concern that the economy was at risk from a steep fall-off in corporate profits, and that there would likely be a related pullback by companies in purchasing equipment and technology. (Cisco Systems, once one of the brightest high-tech lights, announced layoffs and a $2.5 billion inventory write-off earlier this week, comparing the plunge in demand for its products with a “100-year flood.”) The Fed also cited concern that the drop in so many stock prices – and a rapidly rising rate in claims for unemployment insurance (the fastest since 1990-91) – would lead consumers to rein in spending.
This fourth such cut in three and a half months was also considered the most surprising. On Jan. 3, 2001, when Fed chairman Alan Greenspan announced the first of the cuts, the Dow jumped 2.81 percent for the day, but then fell a half percentage point over the next four weeks. On January 31, the second of the cuts was announced, leading to a very slender 0.06 percent Dow gain for the day and an 8.53 percent drop over the next month and a half. On March 20, even with the third rate cut, the market dropped for the day by 2.4 percent, but has gained more than 5 percent in the ensuing month. It has been another rate cut on top of this gain that has led analysts to conclude the Fed is much more worried about the economy than it has been letting on. However, based on yesterday's stock market performance, the Fed's fear doesn't seem to be alarming investors.