Fri, Feb 02, 2001 EST
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Stocks Fall After Fed Lowers Interest Rates;
Analysts Look Ahead

   Fox Market Wire
NEW YORK — With Wall Street increasingly worried about a recession, investors sold off stocks Wednesday after the Federal Reserve made its much-anticipated announcement that it would lower interest rates, for the second time in a month, by half of a percentage point.

Investors interpreted the Fed's announcement as a reason to take profits from the market's recent gains. Although lower rates are intended to eventually lift earnings and the economy, investors couldn't be sure how long that would take.

Analysts had expected the post-announcement selling because the market had already factored the half-point rate cut into stock prices.

"This was the most telegraphed rate cut in history," said Gary Kaltbaum, a technical analyst at JW Genesis.

Still, the Fed pledged that this second rate reduction was part of a "rapid and forceful" response to the economy's dramatic slowdown and was viewed as a strong signal the central bank plans to move as aggressively as it can to fight the growing threat of a recession.

The widely expected rate cut drew a far more muted response on Wall Street than the Fed's surprise announcement of its first half-point reduction on Jan. 3. That move triggered the biggest one-day rally in Nasdaq's history.

On Wednesday, the Dow Jones industrial average ended the day up just 6.16 at 10,887.36, while the Nasdaq fell by 65.62 to 2,772.73, a reaction analysts attributed to profit-taking.

"The market is just hanging in there," Kaltbaum said. "There are still issues in the marketplace, recession and the quality of earnings going forward. ... The main question now is: Do we go into a recession or not?"

The Fed said it was lowering its target for the federal funds rate, the interest that banks charge each other for overnight loans, to 5.5 percent. It had been at 6.5 percent at the beginning of this month, reflecting six rate increases from June 1999 to May 2000 as the central bank pushed rates higher to slow growth and combat inflation.

The two half-point cuts marked the first time in Federal Reserve Chairman Alan Greenspan's 13-year tenure that the central bank has reduced the funds rate by a full percentage point in a single month.

The Fed's action meant a further drop in borrowing costs for millions of Americans as commercial banks immediately announced reductions in their prime lending rate, the benchmark for many business and consumer loans, by one-half point to 8.5 percent.

The Fed statement cited a long litany of economic troubles that had caused it to act.

"Consumer and business confidence has eroded further, exacerbated by rising energy costs that continue to drain consumer purchasing power and press on business profit margins," the Fed said in its statement. "Taken together, and with inflation contained, these circumstances have called for a rapid and forceful response of monetary policy."

Analysts viewed the back-to-back half-point reductions and the Fed's strong language as a clear signal more rate cuts are coming.

"The Fed is telling us that they are going to do whatever they possibly can to keep us out of a recession," said Martin Regalia, chief economist at the U.S. Chamber of Commerce.

The Fed's action came after the government reported Wednesday that economic growth slowed to just 1.4 percent at an annual rate in the final three months of 2000, the weakest increase in the gross domestic product in more than five years.

Investors have been shaken by the recent reports showing that the economy has slowed more than analysts expected. But they also are optimistic the economy and corporate earnings will pick up as interest rates fall.

Wall Street has "confidence in that [lower] interest rates usually, but not instantly, improve the economy. But that is being counterbalanced by a litany of downgrades of earnings and layoffs," said Robert Stovall, market strategist for Prudential Securities.

The Associated Press contributed to this report

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