Fed lowers key rate by half-point

Third cut this year is not enough to satisfy Wall Street

Stocks tumble with news

Central bank leaves open possibility of another trim soon

March 21, 2001|By William Patalon III | William Patalon III,SUN STAFF

Federal Reserve policy-makers cut a key interest rate by half a percentage point yesterday - disappointing investors who wanted more - though the central bankers left the door open for additional rate reductions soon.

Wall Street's disappointment, in concert with continued worries about the U.S. economy, touched off another heavy sell-off in stocks after the 2:15 p.m. Fed announcement. The Dow Jones industrial average fell 238.35 points, or 2.39 percent, to close at 9,720.76. The technology-laden Nasdaq composite index nose-dived 93.74 points, or a steep 4.8 percent, to finish the day at 1,857.44.

In recent weeks, as stocks continued their slide and the economy displayed additional signs of weakness, Fed Chairman Alan Greenspan has found himself facing increasing pressure to reduce rates by three-quarters of a point. But it was not to be.

At its meeting yesterday, the central bank's policy-making arm, the Federal Open Market Committee, trimmed the benchmark overnight lending rate to 5 percent, its lowest level in 19 months. It was the third time in 2001 that the Fed reduced that rate by a half-point.

"I think a half-point was the right dose," said James Hardesty, president of Hardesty Capital Management in Baltimore. "If it's not enough, all [Greenspan] has to do is hit the gas pedal again."

Although most analysts expected only a half-point reduction, enough were predicting a three-quarter-point cut to create some hope for a bigger drop in interest rates. Seventeen of the 52 economists surveyed by Bloomberg News were expecting the three-quarter point reduction, the minimum most believed was needed to reverse the market's recent slide.

"I think it's a very big mistake," said David Citron, a managing director for the Pikesville office of New York-based Carret & Co., which manages $2 billion for clients. "As far as the economy goes, you have to create the perception that you're going to do anything [required] to rejuvenate growth" and reverse the decline in stock prices.

Many of the nation's biggest banks quickly lowered lending rates. First Union Corp., Citibank and Bank of America Corp. all announced half-point reductions in their prime rate, bringing the benchmark rate charged to their most credit-worthy customers down to 8 percent. That will benefit businesses as well as consumers, who should see a drop in borrowing costs on automobiles and other big-ticket items.

But the Fed's chief objective is to prolong a record economic expansion, which was in its 10th year when troubles surfaced. Fed officials said yesterday that falling stock prices, a U.S. manufacturing slump and slowing economies abroad contributed to their decision to reduce interest rates.

"Persistent pressures on profit margins are restraining investment spending and, through declines in equity wealth, consumption" spending, the Fed stated.

Ironically, the central bank caused many of these problems in the first place: Between June 1999 and May 2000 - hoping to keep a sizzling economy from overheating - the Fed boosted the overnight lending rate six times for a total increase of 1.75 percentage points. Now, with economic data surfacing that are at times contradictory, some experts say the Fed apparently wants to make sure it doesn't lower rates more than needed to keep the expansion alive.

But for those disappointed with yesterday's action, it only takes a look at the past to underscore how aggressive Greenspan is being. Usually, rate actions come a quarter-point at a time. But with the economy slowing so precipitously, the Fed has already reduced rates by a half-point on three occasions this year - including twice in January, the only time during Greenspan's stewardship that the central bank has cut rates by a full percentage point in a single month.

One of those January rate cuts came between meetings of the FOMC policy-makers, who are next scheduled to meet May 15. But they might not wait.

"In these circumstances, when the economic situation could be revolving rapidly, the Federal Reserve will need to monitor developments closely," the Fed stated yesterday.

Some experts said yesterday's disappointment over the half-point reduction was exacerbated by fears that the economy is in more trouble than previously thought. In fact, some economists wonder whether Fed officials thought they would cause less alarm by bringing rates down by a half-point and adding another quarter-point next month.

"This reads like they are more scared than they have been willing to admit, and that they are ready to cut rates further - maybe soon," said Ian Sheperdson, chief U.S. economist at High Frequency Economics Ltd. in Valhalla, N.Y.

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