Newspaper article The Christian Science Monitor

Interest-Rate Cut Isn't Sparking the Stock Market

Newspaper article The Christian Science Monitor

Interest-Rate Cut Isn't Sparking the Stock Market

Article excerpt

THE Federal Reserve Board's latest interest-rate reduction - it's fifth consecutive reduction in under a year - is not expected to be any more effective in jump-starting the stock market (as well as the overall United States economy) than the fourth reduction, according to a number of Wall Street analysts and economists.

Wall Street greeted the latest round of rate reductions with "somewhat of a yawn," says Dennis Jarrett, chief market analyst for Kidder, Peabody & Co. The Dow Jones industrial average rose only 7.15 points last Wednesday, the day the rate cuts were announced. Still, the modest rise broke a four-day losing streak.

The rate reduction - which involved a cut in the discount rate from 5 percent to 4.5 percent, as well as a reduction in the federal funds rate from 5 percent to 4.75 percent - had been widely anticipated. Investors had already "discounted" the cut in terms of market strategy. But beyond that, according to Mr. Jarrett, past historical evidence suggests that such a consecutive series of rate reductions tends to be essentially "neutral" in terms of quickly nudging the market.

Jarrett studied six 12-month periods in which the Fed made at least five consecutive rate reductions. The fifth cuts in these series took place on Nov. 3, 1921; May 20, 1930; Aug. 27, 1937; Feb. 19, 1971; May 16, 1975, and July 20, 1982.

The average market gain one month after each fifth consecutive rate cut, as measured by the Dow, was 1.17 percent. (The market rose four out of the six years.) Six months after the fifth rate cut the average gain for the market was 0.7 percent. (The market was up four times out of the six cuts.) A year later, the average gain was 7.1 percent. (And again, the market was up four out of the six times the cuts occurred.)

But something else occurred.

"The more consecutive discount rate cuts you get, the greater the chance" for sharp movements in either an up or down direction months later, says Jarrett. In 1921 and 1982, for example, the market was up by 34 percent and 46 percent respectively 12 months after the fifth straight rate cut. …

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