Stocks dive on worries about U.S. recession
NEW YORK » An unusual emergency interest rate cut by the Federal Reserve gave Wall Street a partial rebound yesterday from a precipitous early decline -- and perhaps the first steps toward a long-term recovery. The rest of the comeback, for the economy as well as the stock market, may depend on a turnaround in the battered housing market and renewed confidence among U.S. consumers.
The Dow Jones industrial average, down 465 points shortly after trading began, fluctuated throughout the session before closing with a milder drop of 128.11, or 1.06 percent, at 11,971.19, according to early calculations.
U.S. stocks began the day following the lead of markets abroad that had plummeted for two straight days, and also extended their own steep losses from last week. Fears of a U.S. recession -- one that would spread to other economies -- had investors fleeing stocks worldwide.
The Fed, in a move anticipated by many traders, moved before the opening of trading, cutting its benchmark federal funds rate by 0.75 percentage point. The Dow and other major indexes spent the rest of the day fluctuating, at times approaching the break-even point before heading down again.
The fact stocks didn't continue their plunge was a positive sign, but economists and analysts said a full recovery wasn't likely in the near term. One of the market's greatest concerns is that consumers, who normally account for two-thirds of the economy, aren't in a position to spend the country back into solid growth.
A rate cut tends to spur the economy by making it cheaper for businesses to borrow money. It would also lighten the burden on people with credit card debt and mortgages that have adjustable rates.
"People are up to their eyeballs in debt, and they're being asked to borrow more," said Mike Schenk, senior economist for the Credit Union National Association.
"This is a cure for the wrong disease. It makes everybody feel good, but it's not going to have any ongoing benefit," said Daniel Alpert, managing director of Westwood Capital LLC. "We need to get ourselves out of a mountain of debt and overvalued properties."
Still, interest rate reductions are one strategy the Fed has used in previous crises to help the economy recover.
The Fed lowered the target federal funds rate, or the interest banks charge one another for overnight loans, to 3.50 percent and the discount rate, the interest the Fed charges banks directly, to 4 percent.
This rate cut was unusual, coming between regularly scheduled meetings of the central bank's policy-making Open Markets Committee. The next gathering is a week away.
The Standard & Poor's 500 index, the broad market measure most closely followed by traders, fell 14.69, or 1.11 percent, to 1,310.50, while the Nasdaq composite index lost 47.75, or 2.04 percent, to 2,292.27.
Stocks have been beaten down amid the mortgage and credit crisis. The Dow, for example, is down nearly 10 percent since the beginning of the year -- logging its worst first 14 trading days of the year ever. It is more than 15 percent since its record close of 14,16.53 on Oct. 9, and is at its lowest close since Oct. 17, 2006.