Fed races to ease market fears
Its rate cut of 3/4 of a point is the largest in at least 20 years.
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The sharp drop-off in the stock market is not helping the Fed either. Some of the US stock averages have now dropped close to 20 percent, widely considered to be a sign of a bear market, and all three major markets are now on pace to have their worst January in history, analysts say. As stocks drop, it adversely affects corporate confidence, says Fred Dickson, chief market strategist at D.A. Davidson in Lake Oswego, Mont. "The volatility causes business leaders to pull back on their spending," says Mr. Dickson. "So if we're not in a recession already, the market has made it one."Skip to next paragraph
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However, some economists are not certain the Fed should be reacting to the markets. "The action itself creates its own concern," says Mark Zupan, dean of the Simon School of Business at the University of Rochester in New York. "You worry that people will ask, 'How bad can it really be?' "
The Fed's actions follow the Bush administration's proposal last week to stimulate the economy by tax rebates or incentives by $145 billion. Congress says it will pass a stimulus bill quickly. And economists believe it could add nearly 1 percentage point to the economy's growth once the checks start arriving in mailboxes.
However, Dickson says the size of the plan may have surprised skittish investors in Europe and Asia. "The Bush plan was twice as large as some of the proposals before Congress," he says. "It sent a big signal that the US is looking at something quite severe."
Mark Rice-Oxley reports from London:
European markets endured another day of turmoil despite the Fed's intervention. News of the rare 3/4-point cut gave many investors some respite after another wretched start to the day. By the end of the day, the benchmark indices in London (FTSE 100), Paris (CAC 40) and Frankfurt (DAX) all ended firmly higher.
The fear in Europe is twofold: that economies this side of the Atlantic will suffer if the US does descend into recession, with markets for European goods and services taking a hit from the recoiling US consumer; and that central bankers in Europe might not act as speedily as their American counterparts in addressing the situation.
"The jury is still out on whether this [Fed rate cut] will work," says Julian Jessop, an economist with the London-based consultancy Capital Economics. "Equities have regained some ground on European markets, but they are still substantially lower than they were at the end of last week.
"Europe is exposed [to the US] but there is also a fear that policymakers in Europe will be slow to respond," he adds. "Even though the problems are triggered by a crisis in the US housing market, there is a perception that Europe is just as vulnerable."
The Bank of England said it had no plans for an emergency interest-rate decision before its next scheduled meeting Feb. 6. Many analysts now think that meeting will produce a rate cut. The FTSE 100 index has now suffered its worst start to a year since records began, 14 percent lower than it stood on Jan. 1. The European Central Bank has avoided rate cuts through the current credit crunch crisis.