Myron Kandel: Market reaction to Fed rate cut

Myron Kandel

Confronting the first bear market since 1987, the Federal Reserve (Fed) cut interest rates by half a percentage point for the third time since January of this year in effort to bolster the sagging market. Some investors were disappointed that the Fed did not cut rates more aggressively, and it showed as stock prices plunged at the end of the day. However, some believe that the Fed did leave open the possibility of cutting rates further prior to next meeting in May.

Q: What does this rate cut mean for the average consumer?

Kandel: It means interest rates are going down on such things as credit cards, interest payments and mortgages. Large banks have already started cutting their prime rates, and a lot of consumer lending is tied to the prime.

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Q: Why do some analysts believe this rate cut is well behind the curve?

Kandel: A lot of people on Wall Street had been hoping that the Fed would cut the rate by three-quarters of a percentage point even though the majority felt it would be half point. The feeling was that the market had fallen so sharply recently that a larger cut would be necessary to give the market a shot in the arm. However, the general feeling was that under Alan Greenspan’s tenure, the Fed had never before cut rates three-quarters of a point in one shot. That’s why the consensus view was that today’s cut would be a half point. Nevertheless, the market was disappointed when it got only a half point, and that accounts for the sharp sell off in the last hour of trading.

Q: Was today’s stock market plunged caused by the disappointment of institutional investors or the average investor?

Kandel: I would say institutional investors because they react quickly and in a big way to news like this. The big question is what will happen tomorrow after all investors have had a chance to mull over what the Fed did and what it implies to the future.

Q: What do economists generally feel about the state of the economy?

Kandel: A majority feel that the economy is neither in recession nor heading for recession, but in the midst of a severe downturn. Positive signs that indicate the economy is not in as bad a shape as some say are better than expected employment figures and some improvement in consumer confidence.

However, there is a minority of economists who feel that the economy, particularly in the tech sector, is sliding into recession. That is why the Fed’s action is welcomed for giving the economy a shot in the arm. Traditionally, it takes good three to six months before lower interest rates filter into the economy in a big way. The Fed did not start cutting rates until January, so we are just beginning to get into the period when the easing of interests is affecting the economy. There are many economists who believe there will be further interest rate cuts in the months ahead.

Q: How often has the Fed cut rates between meetings?

Kandel: Rarely. There is a strong feeling that they will cut rates again between now and the next Fed meeting, which is May 15. Having said that, many people, including me, believed that the Fed would cut rates between its last meeting in January and today. It really depends on what kind of economic data we get in the month ahead.

Q: What type of important data will be released during the next month?

Kandel: On Wednesday, we get the consumer price index (CPI) which is expected to show that inflation at the consumer level is well under control. It was interesting to note that the Fed’s statement about cutting interest rates today did not even mention inflation, so it is not considered a threat.

On April 6, the first Friday of the month, we will get the employment figures for the month of March, which are considered very important. That will be very key. It could help determine if the Fed cuts rates before next meeting. Another factor might very well be what happens abroad. If there are serious problems overseas, the fed might feel the need to cut rates in reaction to that.

Q: Which countries’ economies should we be watching?

Kandel: Japan has the second biggest economy in the world, and it is in dire straits. Japan’s economy is the one that gives American economists the willies about the immediate future.

Q: As Americans watch the Fed, the NSADAQ, and the stock market, what should they keep in mind?

Kandel: Traditionally the stock market rallies when the Fed embarks on a concerted round of interest rate cuts. Following the start of 13 of the last 14 interest rate cuts, the stock market has been substantially higher within a year.

More specifically, the NASDAQ composite is down well over 60 percent from its record high, while the DOW is down about 17 percent. The real damage has been done in the NASDAQ, which is loaded with tech stocks, and some of them may take longer to recover than old-economy stocks.

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CNNfn: Eyes on the Fed

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