Newspaper article The Christian Science Monitor

Dow Drop May Keep Fed from Raising Interest Rates ; the Stock Market Has Been Falling for More Than a Month - Which Could

Newspaper article The Christian Science Monitor

Dow Drop May Keep Fed from Raising Interest Rates ; the Stock Market Has Been Falling for More Than a Month - Which Could

Article excerpt

The stock market, one of the pillars of the economy, has a few hairline cracks. Not real fissures, just yet, but a few spider-web lines, the type that show up on a pillar when it's in need of paint.

Since mid-August, the Dow Jones Industrial Average has lost 1,000 points, and last week it dropped 524.30 points - the worst numerical loss in history.

There are plenty of reasons to think that the blemishes don't have any deeper meaning than a bad month on Wall Street. After all, economists are not predicting a recession because gravity is pulling the Internet stocks back to earth. And it's still too early to say retailers might see slightly dimmer holiday shopping because a mutual fund is up only 9 percent instead of 20 percent.

Yet the downturn may have other ramifications for the US and its economic policy - such as a sigh of relief from the Federal Reserve Board, which meets Oct. 5 to look at interest rate policy.

In a recent speech, Fed chairman Alan Greenspan said the Fed might have to factor in the stock market when setting monetary policy. In the past, Greenspan has worried that the market might be getting out of hand and then crash, requiring the Fed to bail out the investment community.

"I think Greenspan would love it if we let a little bit of air out of the balloon," says Charles Pradilla, chief investment strategist at SG Cowen, a brokerage house in New York.

Indeed, a market cool-off could actually be beneficial, since it "could have one more moderating effect on consumption," adds Gerald Cohen, an economist with Merrill Lynch & Co. in New York.

Besides, Mr. Cohen adds, the stock market's rise has created enormous investor confidence, and last week's drop will not shake that. "We have taken away so little of what we have gained that it's not as if the US consumer has to scrap all their plans because of a 1,000-point drop in the Dow," says Cohen.

Even after early trading Sept. 28 - when the Dow Jones average was down some 120 points from the previous day - the market was still up about 12 percent for the year. A broader market index, the Standard & Poor's 500, is up only about 4 percent. But, those indexes don't tell the whole story. …

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