January 30, 2008
Fed Watch: There Will Be Cuts
UPDATED.
A Wall Street rally following a 50-basis-points rate cut from the Fed today was not long for this world, as yet another negative economic report sent the Dow back down 37.47 points to close at 12,442.83. The S&P 500 and Nasdaq also pulled back from afternoon bumps.
Earlier in the afternoon, the Fed slashed interest rates to 3 percent, as was widely anticipated. The confirmation sent the Dow Jones industrial average and the S&P 500 ticking back up. But bad news from the bond sector sent those indexes sinking back down.
The brief rally may just have been a sigh of relief that the Fed had delivered as projected. New data released today show economic growth is grinding down, heightening fears of a recession this year.
"Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets," the Federal Open Market Committee said in a statement. "The committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully."
Chairman Ben Bernanke joined in the near-unanimous decision. Voting against the cut was Richard Fisher, president of the Federal Reserve Bank of Dallas. The Board left the door open to future reductions.
"It's great that they did it now. I wish they had done it earlier," said CNBC's Jim Cramer, who has been screaming -- sometimes literally -- about the Fed's slowness to act on the housing bust and credit crunch.
Economists could not agree on whether the Fed was acting proactively enough or not. According to an impromptu online survey [PDF] of financial experts, nearly eight in 10 respondents agreed with the half-point cut, but the group gave Bernanke an average grade of B-minus.
Investors were nervously awaiting word on the rate cut this morning, nine days after the Fed made an emergency three-quarter-point slash in order to calm manic global markets. There was some uncertainty about how deep the cut would be. Most economists were expecting a half-point reduction, but some feared the Fed might cautiously nip a quarter-point off the rate, which would make it slightly less easy to continue carrying debt.
Remnants of the housing bubble persist, and economists expect the correction in market and stock pricing to continue throughout this year. Whether that correction deepens into a recession remains to be seen, though some economists believe that's already happened.
Stocks opened lower today on a report that GDP growth fell to its slowest rate in five years last quarter. GDP grew 0.6 percent in Q4 2007, far below the 1.2 percent economists had anticipated. The growth slowdown reinforced predictions that the U.S. economy would fall into a recession this year.
But a Labor Department report may help markets end on a higher note later this week. Economists surveyed by Reuters expect the report to show that 63,000 new jobs were added this month, while Bloomberg News collected estimates that averaged to 40,000 new jobs. Meanwhile, ADP Employer Services said today that 130,000 jobs were added in January.
Still, the already-weak dollar slipped further on the GDP report.
Unsettled consumers are awaiting a $146 billion stimulus package from Congress, part of which would involve cutting checks from $300 to $1,200 to millions of households this summer. Yesterday, the House overwhelmingly passed the legislation, which will now be poked and prodded by the Senate. According to CongressDaily, congressional leaders plan to get the bill to President Bush's desk by Feb. 15.
There is some concern that the legislation will get held up by the Senate, where lawmakers are unhappy with some of the bipartisan compromises reached by Speaker Nancy Pelosi, House Minority Leader John Boehner and Treasury Secretary Henry Paulson. The Senate Finance Committee is discussing another version of the stimulus package today that includes extended unemployment benefits. House Dems also sought to include that in their bill, but dropped their demands after Republicans and the White House agreed to include low-income workers in the tax rebates.
In Tuesday's State of the Union address, President Bush warned senators off trying to "load up the bill."
"That would delay it or derail it, and neither option is acceptable. This is a good agreement that will keep our economy growing and our people working. And this Congress must pass it as soon as possible," he said.
Senate lawmakers will prioritize speed, and the bill is expected to land on Bush's desk without any dealbreakers (tax hikes, a higher price tag) by the Feb. 15 deadline.
Posted at 5:04 PM
Posted to:
Bush Administration, Congress, Economy, Federal Reserve, House, President Bush, Senate
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