Fed may cut rates again
Bloomberg News Service
NEW YORK — Five interest rate cuts from the Federal Reserve failed to spark a lasting rally in U.S. stocks. Some say a sixth reduction this week may do the trick.
More than half the economists surveyed by Bloomberg News expect the Fed to lower its interest-rate target by a quarter point, to 3.75 percent.
A growing number say slumping corporate earnings and economic data will prompt the Fed to lower borrowing costs by a half percentage point to keep the economy from sliding into recession.
"The economic news has been on the weak side, so the odds of a 50-point easing have increased," said Richard Hoey, chief economist and chief investment strategist at Dreyfus Corp. "That's a supportive force for the stock market."
The five consecutive half-point interest rate cuts since January are the most in Fed Chairman Alan Greenspan's 14-year tenure, and the most for the Fed since 1982.
Just as many investors in 1999 mistakenly said rising interest rates wouldn't derail the market's rally, now some are saying that even lower borrowing costs won't cause a rebound, Hoey said.
"Time is your friend when the Fed is easing," he said.
The Nasdaq is down 45 percent since the central bank finished a yearlong string of rate increases in May last year.
The central bank's Federal Open Market Committee meets Tuesday beginning at 9 a.m. New York time. A decision on interest rates is expected by 2:15 p.m. Wednesday.
Goldman, Sachs & Co. was the latest to predict a half-point reduction.
"The economy is still in trouble," said Edward McKelvey, senior U.S. economist at the No. 4 U.S. securities firm by capital. The Fed isn't scheduled to meet again until Aug. 21, so the "risks of doing too much are smaller than doing too little," McKelvey wrote in a note to clients.
The S&P 500 had gained 19 percent between April 4 and May 21, and the Nasdaq jumped 41 percent in that period. Both rallied on optimism that lower rates would help spur a recovery in profits and the economy later this year.
Since then, the S&P 500 has slumped 6.6 percent and the Nasdaq dropped 12 percent. The rally stalled as companies lowered earnings forecasts, suggesting a rebound might be further off than anticipated.
U.S. industrial output last month posted its eighth monthly decline as production at factories, mines and utilities fell 0.8 percent. That was twice the decline expected by analysts.
Analysts expect profit for S&P 500 companies to drop 17 percent this quarter and 5.5 percent in the third quarter, according to First Call/Thomson Financial. By the fourth quarter, earnings should rebound to growth of 6.2 percent, the firm said.
Lower rates will prompt more consumers to refinance their debt, which "may free up cash and boost consumer spending," said Rafael Tamargo, head of research at Wilmington Trust, which manages $26 billion.
That will "benefit the higher-growth areas like tech, finance, and consumer-oriented companies like retailers," Tamargo said. Still, he added, any rebound in technology shares may be shortlived because companies already have spent enough on new computer and telecommunications gear.
"The Fed says things aren't that bad, but its actions show it's scared of a recession," he said. "It's doing everything in its power to keep consumer spending afloat. If they fail, we're in big trouble."
