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Tuesday, 20 March, 2001, 23:12 GMT
Markets dive on US rate cut
US interest rates are coming down quickly
by BBC News Online's North America business reporter David Schepp

News of the Federal Reserve's decision to cut key US interest rates by a mere half a percentage point to 5% hit the nation's financial markets with a thud, souring investors and sending stocks plummeting further.

Some on Wall Street had hoped the central bank would make a larger move to cut rates by three-quarters of a point (or even a full 1%) as a signal to investors that the US economy remains on sound footing.

But a cautious Fed, more concerned with signalling to US consumers and the world that the US economy is not in dire straits, disappointed many in financial circles, looking for a more aggressive cut.

Analysts hit the airwaves shortly after the Fed's announcement to criticise the Federal Open Market Committee's decision as too little too late.

Now with US and world markets still grappling with a technology stock tumble, the word recession is being uttered by more and more market gurus.

Market tumble

In making its decision known during afternoon New York trading, the Fed acknowledged that falling stock prices were contributing to a slowdown in economic activity.

While US stock markets waffled shortly after the announcement, stocks soon rejoined the downward spiral seen in recent weeks.

By trading-session end the blue chip Dow Jones Industrial Average fell 238 points to 9720, while the already wrecked Nasdaq Composite Index, stuffed with tech stocks, fell nearly 5% to 1,857.

In its statement, the Fed said that there was the prospect of further economic weakness, leading to speculation that there might be further rate cuts to come.

Still, analysts and traders groused over the lack of a bigger cut, which they hoped would send markets higher.

"I wouldn't make much of this distinction," cautioned John Lipsky, chief economist at JP Morgan Chase, adding that the Fed made it clear that they might opt to cut rates again before their next meeting on May 15, if necessary.

Mr Lipsky said the market's drastic sell-off in reaction to the smaller-than-expected rate cut was a one-day phenomenon.

"More important," he said, "is how the Fed will react" in the face of further slowing in the US economy.

Federal Reserve policy

Analysts and the Fed have been arguing for weeks whether it is the role of the central bank to put the investment community at ease.

In a recent note to investors, Richard Yamarone, director of economic research at Argus Research, said, "market participants should not wait for a Fed-tossed lifesaver every time the Nasdaq tumbles 100 points."

But, in speaking on BBC's World Business Report, economist Cathleen Stephansen said that while economic indicators make a case for only a half-percentage cut, the Fed needed to do more to assuage consumers and businesses alike that the US economy is on a sound footing.

Other analysts disagreed, saying economic data from Washington paints a mixed picture for the economy. One that shows signs of coming back to life.

The Fed decision followed another lacklustre announcement by the Commerce Department that the US trade deficit widened slightly to $33.3bn in January but was shy of the record levels set last year.

It is the second-highest level on record, reflecting a big jump in imports of foreign cars and energy products.

Analysts had been forecasting the trade gap to rise slightly above December's deficit of $33.2bn, but to be below the record $33.5bn set in September 2000.

"We think this is consistent with what is needed in the real economy, and this is right on track with what we were expecting," Frank Waung of SG Cowen said:

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20 Mar 01 | Business
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