The Federal Reserve didn’t cut interest rates on Tuesday, as many stock market investors had anticipated.
And those same investors, not getting what they wanted, didn’t behave as expected, sending stock values higher instead of lower.
“The chatter until 12:10 p.m. was that the Fed would cut rates,” said Jon Zeschin, president of Essential Advisers Inc. in Denver.
Stock indexes did drop initially after the Fed announcement came out. They bounced around for a while, then rallied strongly with the Dow Jones industrial average gaining 1.3 percent and the S&P 500 rising 1.75 percent.
The Fed decision to stand firm on interest rates continued the tough-love approach of last weekend, when federal officials refused to bail out struggling investment bank Lehman Brothers.
Zeschin said the decision marks the end of what was known on Wall Street as the “Greenspan put,” back when “no matter how much risk you took or how bad things were, the Fed would always be there to bail things out.”
There also are serious questions about what a rate cut would have accomplished, said Craig Carnick, president of Carnick & Co., a financial advisory firm based in Colorado Springs.
The issue isn’t the cost of money, but its availability, Carnick said. Lenders remain reluctant to lend at any interest rate.
To ease liquidity, the Fed injected $70 billion into the economy Tuesday, following a similar-size injection Monday.
Some critics link earlier Fed rate cuts to a weakening of the U.S. dollar that contributed to a spike in oil and other commodity prices.
Those increases stoked inflationary pressures, which the Fed cited as a continued concern despite a 0.1 percent dip in the August Consumer Price Index from July.
“Inflation has been high, spurred by the earlier increases in the prices of energy and some other commodities,” the Fed said.
The current crisis represents the culmination of 17 years of people borrowing more than they made, Tucker Hart Adams, a Colorado Springs economist, told clients of investment adviser Sharkey, Howes & Javer on Tuesday.
“The chickens have come home to roost,” she said. “We have a difficult 12 to 18 months ahead of us.”
Two years ago, Adams forecast that excessive borrowing and a housing bubble would contribute to an economic contraction starting in late 2007.
Employment and retail sales growth are slowing sharply in the state, which is denting local government budgets, Adams said.
Permits to build homes are on track to decline by more than third this year, after dropping 21 percent in 2007 and 16 percent in 2006.
“I don’t think the Federal Reserve or the Treasury have the answers, although they are trying to figure it out,” Adams said.
Aldo Svaldi: 303-954-1410 or asvaldi@denverpost.com
