The abrupt rate cut by the US Federal Reserve Tuesday received a cold shoulder from frustrated US equity investors who continued their sell-off which has rippled across the global stock markets over the past few days.
The Fed unexpectedly slashed a key interest rate by a bold three-fourths of a percentage point on Tuesday, responding to a global plunge in stock markets that heightened concerns about a recession. It was the biggest one-day move by the central bank in recent memory.
However, the US stocks nose dived with the Dow Jones Industrial Averages losing 465 points at open. Although the key index regained some ground afterwards, it still shed 128.11 points to close at 11971.19.
Analysts said the rate cut, which was aimed at preventing the US economy from sliding into a recession, would help restore investor confidence and quell further market turmoil.
However, the market did not react as vehemently as was expected, with the Dow, Nasdaq and S&P 500 indexes lingering in the negative territory in the entire session.
This showed investors were very much concerned about the prospects of the US economy and that a mere rate cut was not enough to fend off a recession, analysts said, adding that the Fed should inject more liquidity.
According to analysts, the Fed's decision to cut both its federal funds rate to 3.50 percent and the discount rate, the interest it charges to lend directly to banks, came a week before the central bank's regularly scheduled meeting, a sign that the Fed acknowledged the seriousness of the world's financial situation.
While rate cuts are usually regarded as good news for the stock market, investors however fled the market, sending a clear signal that market problems are still serious.
Investors are well aware that housing concerns remain, as many adjustable-rate mortgages, similar to those that went bad last year, will still be adjusted higher, and home prices are expected to keep sliding this year. Financial companies have lost billions due to those mortgages, retail sales are falling and companies in general are not on a spending spree.
In addition, investors, institutional and individual, are also in a defensive mode, one that an interest cut won't immediately change, according to AP.
To fully restore investor confidence, according to analysts, investors must see strong economic and earnings data of such big-names as Microsoft Corp., AT&T Inc., Caterpillar Inc. and Honeywell International Incas in the coming months. They also have to hear good news from such banking giants as Citigroup Inc. and Merrill Lynch & Co., which have lost billions due to investments in failed mortgages.
Wall Street has every reason to worry about the U.S. economy as they have been beaten severely by bad news for quite a while. The banking industry in the second half of 2007 watched its portfolios shrink by some 135 billion dollars because of losing bets on mortgages. The Bank of America announced Tuesday that its earnings in the fourth quarter of 2007 fell 95 percent and Wachovia Corporation's profit shed by 98 percent in the last three months of 2007.
In response to market call, the Bush administration has proposed ways to ease Americans' plight, first with a plan to prevent more mortgages from going sour, and last week, with an economic stimulus package that included 145 billion dollars in tax cuts. On Tuesday, the White House said President George W. Bush would not rule out the possibility of a larger package.
Speaking in an interview with CNBC, an investor said the package plan was just like "a drop of water in the sea" in terms of the huge market size and problems.
Rate cuts and stimulus "won't avert a recession but will probably make it a much milder recession than it otherwise might have been," said Nariman Behravesh, chief economist at Global Insight in Lexington, Massachusetts.
In the meantime, some analysts said the market decline on Tuesday was part of the inertia from the big sell-off across the world over the past few days.
"We had pent-up selling in US equities because we were closed yesterday. Those orders were waiting to be executed in global portfolios regardless of a Fed cut, regardless of stimulus package," said Art Hogan, chief market strategist at Jefferies & Co.
"The markets are getting to reasonable valuations. Unfortunately, the trip there is very painful," he added.
(Xinhua News Agency January 24, 2008)
