Associated Press
NEW YORK — As Wall Street found out this week, Alan Greenspan isn’t at its beck and call.
The Federal Reserve chairman’s refusal to lower interest rates immediately ignited a selloff in stocks and complaints from many market pundits about Wall Street’s suffering — although a rate cut is likely to come at the Fed’s next regularly scheduled meeting March 20.
The grumbling wasn’t unanimous. Some said Greenspan’s decision merely illustrates a difference in the way the Fed and the markets view each other.
Supporters of a pre-March 20 cut contend the economy is in such critical condition that the Fed can’t afford to wait three weeks. Two rate cuts are better than one, they argue, on the assumption the Fed would cut now and then again March 20.
"Monetary policy is too tight ... and it would be far better for it to come down rapidly and forcefully and therefore get the threat of recession out of the way," said Wayne Angell, chief economist at Bear Stearns and a former Fed governor.
Angell, who made news Monday with his statement that a rate cut was 80 percent likely before March 20, has since retracted his prediction.
The grumbling and selloff Wednesday on Wall Street were evidence that a lot of people shared his opinion.
But another group of market watchers say the Fed’s action reflects its broader focus on the overall economy — and the fact that Wall Street is just one part of that economy.
"I think a rate cut was an unreasonable expectation," said Larry Wachtel, market analyst at Prudential Securites. "Greenspan’s not out there to help the stock market. He’s out there to help the economy. This is simply people watching their great profits of the last few years dissolve and saying, ‘Do something.’"
Indeed, the markets have a history of looking to the Fed for guidance before making any significant bets, according to Robert J. Barbera, chief economist at Hoenig & Co. But the relationship is somewhat one-sided.
"The Fed’s unwillingness to ease again right now is a signal that they will ease as much as the real economy data tells them to, but they’re not going to ease solely because the market is sinking," Barbera said.
Greenspan’s comments before the House Financial Services Committee on Wednesday suggested as much.
"The exceptional degree of slowing so evident toward the end of last year, perhaps in part the consequence of adverse weather, seemed less evident in January and February," he said. Specifically, Greenspan pointed to a moderating level of weakness in auto and home sales as encouraging signs.
The Fed already has cut rates twice this year, and Greenspan might want to give those cuts a chance to stimulate economic growth, then corporate growth and finally corporate profits and stock prices. It usually takes about six months for that to happen, according to most estimates.
Barbera, the Hoenig economist, said the market’s dependence on and reaction to the Fed is part of a classic pattern that has been repeated over the years. It’s normal for the market to turn to the Fed for help and then get frustrated if the help isn’t coming fast enough — before accepting the fact that a turnaround may take a while.
That may provide little comfort to investors watching their stock portfolios shrink. Wachtel, the Prudential analyst, notes investors need to remember that lower interest rates won’t fix the weakness in the economy. Although they should eventually help, they’re no immediate panacea.
"It doesn’t solve the problem of Oracle missing their quarter, as they did this week, or another company making the same announcement," he said, referring to the software company’s announcement of a weaker earnings outlook. "There is no magic bullet here. If you enjoyed the great bull market of the last few years, you had to recognize there was a downside to it."
For the week, the Dow Jones industrial average rose 24.41, a 0.2 percent gain, to 10,466.31, after rising 16.17 Friday.
The Nasdaq composite index fell 144.88, or 6.4 percent, to end the week at 2,117.63, a level not seen since December 1998. It lost 65.74 on Friday.
The Standard & Poor’s 500 ended the week off 11.68, or 0.9 percent. It finished at 1,234.18 after losing 7.05 on Friday.
The Russell 2000 index, which tracks the performance of smaller company stocks, fell 0.57, or 0.1 percent, for the week after inching up 3.58 on Friday. It closed at 476.88.
The Wilshire Associates Equity Index — which represents the combined market value of all New York Stock Exchange, American Stock Exchange and Nasdaq issues — ended the week at $11.374 trillion, off about $160 billion from the previous week. A year ago the index was nearly $14 trillion.
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