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Anxious Investors Hope for 3rd Rate Reduction From Fed

Markets: Talk of a surprise rate cut by the central bank this week stemmed a deep stock sell-off Friday.

February 26, 2001|TOM PETRUNO | TIMES STAFF WRITER

Wall Street opens today with jittery investors looking for help from the usual suspect: the Federal Reserve.

A deep stock sell-off early Friday was substantially reversed as rumors spread that the Fed this week will cut its benchmark short-term interest rate for the third time this year.

At its low point Friday, the blue-chip Standard & Poor's 500 index was down about 3% for the day and down slightly more than 20% from its record high reached last March. Had the index closed below that 20% mark, it would have crossed Wall Street's bear-market threshold--something that hasn't happened with the S&P since 1990.

Late buying Friday left the S&P down 6.96 points, or 0.6%, for the day, at 1,245.72. It is down 18.4% from its record high.

The technology-dominated Nasdaq composite index, which last year plunged deep into bear-market territory, was off as much as 3.9% on Friday before rebounding to close up 17.55 points, or 0.8%, at 2,262.51. It is down 55% from its all-time high.

Buyers flocked back to stocks Friday after brokerage Bear, Stearns & Co. put out a report saying there is a "60% probability the Fed will be cutting rates" early this week.

The report was written by the firm's senior economist, John Ryding, and was signed also by chief economist Wayne Angell, a former Fed governor.

Ryding said sinking stock prices reflected pessimism about the outlook for an economic turnaround later this year. What's more, he said, the market's woes could further damage the confidence of American consumers, raising the risk that they will slash their spending. Consumer spending is the principal driving force of the U.S. economy.

A key barometer of consumer sentiment, the Conference Board's monthly consumer confidence index, will be released Tuesday morning and could be the trigger for another Fed cut, analysts said.

In a Feb. 13 speech, Fed Chairman Alan Greenspan focused on consumer confidence as an important gauge of whether the slowing economy risked falling into recession.

Greenspan is to testify before the House Financial Services Committee on Wednesday, and it might be harder for him to give the mostly upbeat assessment of the economy he delivered Feb. 13, before stock prices crumbled anew.

Despite Friday's turnaround, the S&P 500 index fell 4.3% for the week, while the Nasdaq index tumbled 6.7%. The Dow Jones industrials lost 3.3% for the week, ending Friday at 10,441.90, down 84.91 points.

The Fed cut its target for the federal funds rate, the overnight loan rate among banks, from 6.5% to 5.5% in two half-point January reductions. The central bank said it acted because of rising risks that the economy could slow too sharply.

The Fed's policymaking committee is next scheduled to meet March 20. So a cut in rates this week would suggest that Greenspan believes the economy can't wait even three weeks for additional help in the form of lower credit costs.

"The Fed is not going to let this economy slide into a recession," Gary Campbell, chief investment officer at Commerce Bank's money-management group, told Bloomberg News.

A sharp decline in Treasury security yields Friday indicated that bond investors believe another rate cut is imminent, some analysts said.

The yield on six-month T-bills fell from 4.86% on Thursday to 4.74% on Friday. The yield was 5.04% as recently as Feb. 15.

Though lower interest rates usually are a potent tonic for a slumping stock market, analysts note that the Fed's first two rate cuts this year failed to keep stocks from sinking further in February.

Thus, it isn't clear that another cut will turn the tide of investor sentiment, experts warn.

What's more, the Fed risks renewed criticism that it is focusing too intently on bailing out Wall Street. That criticism was levied after the Fed cut rates three times in late-summer 1998, as markets dived in the wake of Russia's debt default--even though the U.S. economy was showing few ill effects from the Russian crisis.

This time, however, there is little question that the economy has decelerated dramatically from its strong pace of recent years.

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