The Federal Reserve Bank made a dramatic gesture to rein in global recession Tuesday by cutting interest rates by a quarter point for the first time since 1996, but the general reaction to the gesture was "too little too late."
Wall Street was so unimpressed by the long-awaited Fed action that it initially sent the Dow Jones industrial average down by more than 100 points Tuesday before recovering to close off 28.32. That negative trend continued Wednesday morning as the Dow was down 167.36 points along with most other broad market indicators.Why no big stocks surge in the wake of the Fed easing?
"The market had anticipated at least that big of a cut and maybe a little more, so I think the ho-hum to slightly negative reaction was what we had anticipated when we marked prices up a few days back," said Sam Stewart, president of Wasatch Advisors, a Salt Lake-based mutual funds investment firm.
"We were hoping for something better, and we didn't get it."
No, but the best is yet to come, said Jeff Thredgold, economic consultant to Zions Bank and president of Thredgold Economic Associates.
"Tuesday's action by the Fed was a foregone conclusion," said Thredgold. "I've been telling my clients they can expect the Fed to lower rates by 50 basis points (0.50 percent) by the end of the year. We got half of that Tuesday, and it's very likely they will follow with another quarter-point reduction in November."
But it won't end there, believes Thredgold. He also expects another half-point reduction by the Fed, probably in two-quarter-point easings, during the first six months of 1999, which would mean interest rates would be down a full percentage point by midyear.
Specifically, what the Fed did Tuesday was lower its federal funds rate, the rate it charges banks for overnight loans, from 5.50 percent to 5.25 percent. It's the most important of all short-term interest rates and it's one that is controlled exclusively by the Fed.
While the federal funds rate doesn't have a direct impact on long-term interest rates, such as mortgage loans - the market controls those - Thredgold points out that the media attention given any Fed move on rates tends to push the overall market in the direction of the move.
"We may see long-term mortgage rates moving below 6.5 percent for 30-year fixed loans in the next week or so. It's a good time for people to refinance their home loans."
If they haven't already. Mortgage rates have been at levels not seen since the 1960s for months, so most homeowners have already refinanced their mortgages and are unlikely to do so again just to try and capture another small increment.
The rule of thumb has long been that rates should move down at least two full percentage points for refinancing to make sense, although lenders, for obvious reasons, have been pushing that breakpoint down to 1 percent recently.
Brad Baldwin, president of Bank One Utah, said he recently refinanced his own home loan and now wishes he had waited, but he said it's as foolish to anticipate interest rate moves as it is to time the stock market.
"I tell people not to try and outguess the interest rate environment. Don't try and find that last quarter-point or so. It doesn't work."
Norwest, a regional bank based in Minneapolis, immediately lowered its prime rate Tuesday from 8.50 percent to 8.25 percent and other big banks began following suit early Wednesday.
But while lowering the prime rate will help borrowers with credit card rates, consumer loans and interest charged on variable-rate mortgages, it will hurt savers, particularly those who depend on interest from their savings to help pay living expenses. In other words, what is good news to some is bad news to others.
"That always happens," Baldwin said. "Banks make every effort to match their cost of funds with their return on funds. Banks are in the business of renting money from depositors and renting it back to borrowers. If they have to charge borrowers less, then they also have to pay savers less."
To do otherwise, he noted, would mean for banks precisely what happened to the savings and loan institutions in the 1980s when they were having to pay savers high rates for money but were committed to vast numbers of low-rate, long-term mortgages. "Debacle" is the word most often used to describe that unhappy scenario.
The bottom line for Stewart is that Tuesday's Fed action was a non-event.
"I don't see it spurring the economy. It's more a psychological signal. It was only a quarter-point, and the Fed didn't promise any more."
In other economic news Wednesday, the Commerce Department reported that sales of new homes fell 4.4 percent in August, held back by the worst drop in the South in three years.
Nationally, homes sold at a seasonally adjusted annual rate of 838,000, the lowest monthly level so far this year, the Commerce Department said.
That was down from a rate of 877,000 in July and 922,000 in June, the highest on record since the department began tracking sales in 1963.
Also, the Conference Board, a private research group, reported that its Index of Leading Economic Indicators was unchanged last month. It had rebounded 0.5 percent in July after two months of declines.
The index, which stood at 105.5, was in line with economists' expectations.