Fri, Feb 02, 2001 EST
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Fed's Language Hints at Further Rate Drops
By Robert Clow   N.Y. Post
Alan Greenspan cheered economists far and wide yesterday by slashing interest rates 0.5 percent - and signaling that more rate cuts were on the way.

The move was widely expected after a slew of poor economic statistics. The latest, yesterday morning, showed that the economy grew at only 1.4 percent in the last quarter of 2000 - slower than at any time during the last five years.

The cut to 5.5 percent was, nevertheless, a dramatic move. For the first time since 1984 the Fed has reduced rates by a full 1 percent in less than a month.

"Cutting interest rates by 1 percent in four weeks is virtually unprecedented," added Sullivan. "This is a powerful move."

But as often happens with Greenspan, the markets were just as interested in his words as they were in his actions.

"These circumstances have called for a rapid and forceful response," the Fed said in announcing the cut.

And that was interpreted to mean that Greenspan will continue slashing rates until the threat of recession is banished.

"I think they are going to announce more interest-rate cuts," predicted Benedicte Reyes, a finance professor at Long Island University. "The markets are predicting that they will have to lower rates to 5 percent or 4.75 percent."

Economists now expect another 0.5 percent cut within two months. "The Fed will do whatever it takes to prevent recession and re-ignite growth," said Merrill Lynch chief economist Bruce Steinberg in a note to clients.

The stock market might have been expected to rally on this news; it didn't.

Figuring that the Fed move was already priced into the market, the Dow Jones industrial average gained only 6.16 points, rising to 10,887.36, while the Nasdaq slumped 65.62 to 2,772.73, and the S&P; 500 tumbled 7.72 to 1,366.01.

"There were no surprises in the rate cut," said Bill Sullivan, senior economist at Morgan Stanley Dean Witter. "This was in line with the market's revised expectations."

The Nasdaq had gained nearly 15 percent over the last month before yesterday's opening, so it was due for some profit-taking.

Despite the market's short-term indifference, Merrill Lynch strategist Christine Callies put out a very bullish note on the future of the market, advising investors to buy on the dips.

Most economists and strategists expect a fairly positive environment for stocks over the next few months. Morgan Stanley's Sullivan thinks that in resuscitating the financial markets, the Fed has already achieved one of its major goals.

"They make no reference to financial conditions in [yesterday's] press release," said Morgan Stanley's Sullivan, noting that the Fed has shifted concerned from the stock and bond markets to the struggling manufacturing sector.

"Now they have an even more intense focus on the economy," he said.

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