Wall Street presses for rate cut
Wall Street has been clamoring for the Federal Reserve to slash its overnight short-term interest rate target for weeks as a way to ease the credit crunch and lower borrowing costs for consumers and businesses.
The push for a rate cut grew louder Tuesday after The Conference Board said volatile financial markets and continued weakness in housing weakened consumer confidence in August. That ramped up fears that the economy is vulnerable to a pullback, and possible recession, if consumers stop spending in a meaningful way. Economic distress was also evident in a report from Standard & Poor's showing the biggest percentage decline in existing home sales since 1987 and in investment downgrades of three major brokerages.
Despite signs of economic weakness, minutes of the Fed's Aug. 7 meeting did not shed any new light on whether a rate cut from the Fed is imminent. In the minutes, the Fed stressed that it expected "a return to more normal market conditions" and that any monetary "policy response" would be required if a "deterioration in financial conditions" led to an "adverse effect on growth prospects."
Investors looking for a clear signal that more help from the Fed - which has already injected tens of billions of dollars of liquidity into the financial system and cut a rate it charges banks by half a percentage point - was imminent did not get it. The Dow plunged 280 points, or 2.1 percent, to 13,042.
"The market had anticipated the Fed would telegraph a rate reduction, and it did not do that," says Jeffrey Saut, chief investment strategist at Raymond James.
The Fed, however, did signal on Aug. 17 that growth prospects had dived noticeably. That fact had some market observers concluding that the Fed's minutes released Tuesday were old news and that a rate cut was still likely on or before the central bank's meeting on Sept. 18.
"The Fed should be easing," says Jason Trennert, founder of Strategas Research Partners. "The Fed is at risk of making a policy mistake if they don't."
Trennert, who thinks indiscriminate tightening of credit is a potential danger to the economy, says the Fed needs to cut rates by at least half a percentage point by Sept. 18.
The downgrade by Merrill Lynch of Lehman Bros., Bear Stearns and Citigroup to "neutral" from "buy" was due largely to the fallout caused by the credit crunch. "It was another piece of evidence that financial companies are in for tougher times," says Peter Jankovskis, chief investment officer at OakBrook Investments.
Investors will also closely monitor Fed chief Ben Bernanke's speech Friday in Jackson Hole, Wyo., for any hints as to his thinking on the timing and need for a rate cut, says Trennert.
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