Investors mope over cut

A quarter-point interest rate reduction disappoints, and the markets fall sharply.

Associated Press
Published December 12, 2007

NEW YORK - Wall Street plunged Tuesday after the Federal Reserve lowered interest rates by a quarter point, disappointing investors who hoped the central bank would move more aggressively to help the economy overcome the credit and mortgage crisis. The Dow Jones industrial average skidded more than 290 points.

Investors had been expecting policymakers would lower rates for a third straight time, though there was debate over the size of the cut. Most economists anticipated a quarter-point reduction in the benchmark federal funds rate to 4.25 percent - but some investors were hoping for a half-point cut from the Fed's final meeting this year, and their disappointment took the market sharply lower.

The Dow fell 294.26, or 2.14 percent, to 13,432.77 after dropping as much as 313.29.

Broader indexes also fell. The Standard & Poor's 500 index fell 38.31, or 2.53 percent, to 1,477.65, and the Nasdaq composite index fell 66.60, or 2.45 percent, to 2,652.35.

Wall Street had barreled higher the past two weeks, propelling the Dow up 640 points partly on rising optimism that the Fed would do all it could to prevent the economy from slipping into recession. While the Fed indicated Tuesday it was doing exactly that, the market's expectations had run well ahead of the central bank's view of the economy and what it needed.

Fed officials did signal that further cuts are possible if a severe downturn in housing and a crisis in mortgage lending worsen, but that was not enough to assuage the market.

"Expectations may have been for a more meaningful move based on the swirl in the financial markets. But the Fed is acknowledging that maybe things on Main Street aren't as bad as they are on Wall Street," said Bill Knapp, economist and chief investment strategist for MainStay Investments, a division of New York Life Investment Management.

"Time will tell if this restores enough confidence in the system. They're saying that this with the other cuts that we have done should promote growth over time. It's a telegraph that we think this is a sufficient move to alleviate the stresses on the market," Knapp said.

The Fed's rate decision and Wall Street's disappointment followed further word of trouble in the banking sector.

Washington Mutual Inc. became the latest lender to resort to a massive stock sale to shore up its finances. WaMu's plan to sell $2.5-billion worth of convertible preferred stock follows a move by UBS AG of Switzerland to sell $11.5-billion in shares to Singapore's sovereign wealth fund and an unidentified Middle Eastern investor.

Washington Mutual shares fell $2.46, or 12.4 percent, to $17.42 after the nation's largest savings and loan also said it will close offices, lay off more than 3,000 workers and slash its dividend.

The bank also set aside up to $1.6-billion for loan losses in the fourth quarter.