New York – Wall Street fell moderately Monday as investors anxiously awaited the Federal Reserve’s impending decision on interest rates.
The market is betting on a rate cut from the Fed when the central bank meets today, but investors are not sure what it will do and what it will say in its accompanying economic statement. Furthermore, with the major brokerages’ third- quarter results yet to be released, investors are uncertain about how badly the summer’s stock downturn, souring home loans and credit squeeze will hit the banking industry.
Adding to the uneasiness, Northern Rock PLC, Britain’s fifth-largest mortgage lender, saw its stock plunge and customers withdraw billions of dollars after it issued a profit warning Friday and requested emergency funds from the Bank of England.
“This is a critical time for the Fed,” says Peter Hooper, chief U.S. economist for Deutsche Bank Securities in New York. “The stakes have risen.”
The Fed faces a financial- market-driven increase in borrowing costs, as in 1998, and a weakening economy comparable to 2000. The central bank responded to the former with three rapid-fire rate cuts, which some officials now think helped inflate the stock-market bubble.
In 2000, it made the opposite mistake after the bubble burst, waiting too long to cut rates and allowing the U.S. to fall into recession.
It’s possible the Fed won’t go through with a rate cut at all if it believes the economy is still growing moderately and that inflation remains a threat, but most investors expect the Fed to cut the benchmark federal- funds rate, now at 5.25 percent, by at least a quarter-point.
