Central banks in the United States and Europe joined forces Monday, September 17, to shore up the global economy, but Wall Street investors — unable to shake off the effects of last week's terrorist attacks — were unmoved.
The US Federal Reserve slashed its benchmark Fed funds target rate half a percentage point to three percent. The dramatic move came just an hour before anxious traders were to return to the New York Stock Exchange after a four-day shutdown following last Tuesday's attack on the nearby World Trade Center.
Three hours later the European Central Bank stunned the markets by cutting its own base rate to 3.75 from 4.25 percent. "This is the first episode of coordinated monetary policy actions among major industrial countries in many years," economists at Schroeder Salomon Smith Barney said in a report.
The intervention by the Fed was a clear bid to boost investor morale in hopes that US share prices would rally, thereby sending out an unmistakable signal that the nation's economy can defy terrorism.
In the event, however, stocks plunged, with the Dow Jones Industrial Average posting its largest one-day points loss — 684.81 — or 7.13 percent to 8,922.49. The Nasdaq electronic exchange shed 115.75 points, 6.83 percent, to end the day at 1,579.55.
While the slide in the blue-chip Dow topped the previous biggest single-day point decline of 617.78 points on April 14, 2000, it was far from the largest loss in percentage terms — a 22.6 percent plunge on October 19, 1987.
Fears had been widespread that the all-important bourse — the world's largest with a capitalization of $17.3 trillion — would go into a dizzying tailspin. Although curbs were initiated to slow computer-driven trades, a fall of more than 11.4 percent that would have triggered a trading suspension of at least half an hour did not occur.
"While the price declines were dramatic, we did not seem to be in an over-riding sense of panic. Leadership was actually orderly," said Larry Wachtel of Prudential Securities. "There's an oversold aspect that will probably give us relief tomorrow morning."
Treasury Secretary Paul O'Neill told CNN he was not concerned about the fall, and said it was possible that Dow may rebound in the coming months. "For every seller there's a buyer," he added.
European share markets by contrast responded positively to the rate cuts and posted strong gains. In London the FTSE 100 index added three percent to finish a volatile day at 4,898.9. The Frankfurt Dax added 2.88 percent to reach 4,234.55 points while in Paris the CAC 40 index advanced 2.7 percent to 4,015.5. In early trading in Asia Tuesday, Japan's Nikkei-225 gained 126.15 points, or 1.3 percent, to 9,630.56. Sydney's All Ordinaries index surged 2.39 percent, 69.9 points, to 2,965.3.
The Federal Reserve, announcing the interest rate cut, noted that "even before the tragic events of last week, employment, production, and business spending remained weak, and last week's events have the potential to damp spending further."
"Nonetheless, the long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate."
US President George W. Bush predicted that the US economy would weather the crisis because of its underlying strength. "I have great faith in the economy. I understand it is tough right now. Transportation business is hurting. Obviously, the market was correcting prior to this crisis," he told reporters.
But Bush said the underpinnings for economic growth were in place. "There is a challenge ahead of us, and I am confident that our business community will rise to the challenge," he said.
The White House would work with Congress to draw up an economic stimulus package if required to send a "clear signal" to investors that the government was ready to help, the president added.
The Fed, acting in line with an assurance by the Group of Seven richest nations last week to protect the global economy, has promised to maintain liquidity. The Federal Reserve pumped $118 billion into the financial system from Wednesday to Friday to supply banks with dollars after the attacks interrupted exchange trading for many institutions.
Swap agreements with British, Canadian and European central banks provided a combined $90 billion to ensure foreign commercial banks had sufficient supplies of US currency. ― (AFP, Washington)
by Nathaniel Harrison
© Agence France Presse 2001
© 2001 Mena Report (www.menareport.com)
