In The Red, Despite The Fed

Wall Street's Woes Show Worldwide Impact

(CBS)  For the second day in a row, the Dow Jones industrial average lost more than 200 points Wednesday, sending a clear signal to the Federal Reserve that its interest rate cut the day before wasn't enough to restore the market's flagging confidence.

The Dow lost 233.76 points to close at 9,487.00, after shedding 238 points the days before. The Nasdaq ended at 1,830.21, lower by 27.23, and the Standard & Poor's 500 was off 20.48, to 1,122.14.

The Fed Tuesday slashed the key federal funds rate a half-point, which was less than Wall Street wanted, leaving investors hungry for another cut.

Traders hoped the Fed would trim rates again at its next meeting in May, if not before. But a government report on inflation released Wednesday makes such a cut unlikely.

The report that consumer prices rose by 0.3 percent — higher than market expectations — in February reduces the chances that the Fed, which has been reluctant to cut rates if inflation was a risk, will cut again.

Disappointment over the Fed's decision triggered trouble in some world markets as well.

Big European markets on Wednesday opened with losses in response to the smaller-than-hoped-for U.S. interest rate cut, but stocks in Tokyo soared amid speculation that the government was buying into the market to prop up prices.

The state of the Japanese economy has affected American stock prices recently. Last week, bad news out of Tokyo sent stocks downward. It's not clear if the good vibes from Japan would have a positive effect on Wall Street this week.

"This is mostly about confidence, what you've seen happening in the stock market," said CIBC Oppenheimer's Tom Gallagher.

Indeed, the erosion of investor confidence was one dangerous economic development mentioned by the Fed in a statement explaining its decision.

"Persistent pressures on profit margins are restraining investment spending and, through declines in equity wealth, consumption," the Fed said.

With an estimated 60 percent of Americans' savings in the market, the fear is that Wall Street losses could prompt consumers to hold off on spending, which could turn what's now viewed as an economic slowdown into a full-blown recession.

Market Data

Click on the following links for evrything you need to know about the Fed's decision and its immediate impact:

The Statement…
What the Fed said

The System…
How the Fed works

The Stocks…
The markets' reaction

Looking ahead, the Fed said the threat of recession is its chief concern.

"The risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future," the Fed said.

Hence the call to cut rates. Higher interest rates make it more expensive to borrow money for purchases or investments, tending to slow growth. Lower rates have the opposite effect.

The Fed sets a target for the federal funds rate, then conducts so-called "open market operations" to achieve it — basically, selling or buying government bonds to get bond rates in line with the target and get the Fed's own lending reserves to reflect that rate.

Commercial banks base their prime lending rates on the federal funds rate, so the Fed's rate decisions ripple through the economy. That's why some are blaming the Fed for tightening monetary policy over the past two years.

The Fed raised the federal funds rate six times between June, 1999, and May, 2000, hiking the federal funds rate a total of 1.75 points over that period in an effort to prevent inflation.

Then, responding to an abrupt cooling in the U.S. economy, the Fed cut rates twice in January by a half-percentage point each time, bringing short-term interest rates to 5.50 percent.

Some analysts say the reason there wasn't a larger cut this month was the mixed economic picture confronting the Fed.

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A raft of data shows a dramatic slowing in the economy and a deeply depressed manufacturing sector. Government numbers released Tuesday show a growing trade gap between the United States and its trading partners.

However, the unemployment rate is at 4.2 percent, or just above a 30-year low, and the housing market is strong. And despite sagging confidence, consumer spending has recovered in the first two months of this year.

Shoppers, some say, are what's keeping this economy alive.

"They're telling the surveyors they've lost a lot of confidence," said Lyle Gramley, a former Fed governor who's now an economic analyst with the Mortgage Bankers Association of America. "But they're still buying houses. They're still buying automobiles. That's the only reason wh we've stayed out of recession up to this point."