Fed makes second rate cut of the month

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The Federal Reserve Board made its second rate cut of the month in an attempt to perk up the sagging U.S. economy. The Federal Open Markets Committee lowered interest rates today by 0.5% at its regular meeting, after an unexpected 0.5% cut Jan. 2.

"Consumer and business confidence has eroded further, exacerbated by rising energy costs that continue to drain consumer purchasing power and press on business profit margins,'" said the Fed's announcement. Stocks were relatively unaffected by the news. Within a half-hour of the Fed's action, the Dow Jones Industrial Average was up barely 20 points and most agency stocks remained down or flat.

True North Communications--rumored to be a takeover candidate by France's Havas Advertising--was up 30 cents, or 74%, to $40.89 a share, while Havas' American Depositary Receipt shares were down 25 cents, or 1.69%, to $14.50. Publicis ADRs saw the biggest gain among agency stocks, up 40 cents, or 1.19% to $33.90, while Interpublic Group of Cos. saw the largest drop, at 82 cents, to $40.68 per share, a loss of 1.98%.

This cut was not expected to have a sharp effect on the stock markets, since many analysts had already factored the action as inevitable after yesterday's announcement by the Conference Board that its consumer confidence index has dropped to its lowest level in four years. Many analysts had even spun a 0.75% drop scenario during the last week, saying anything less than a 0.5% cut could cause the markets to crash.

Merrill Lynch & Co. chief economist Bruce Steinberg said the cut will be the first of many until the FOMC members are satisfied the risk of recession has passed.

"We are now expecting that they will ease at each of the next three Fed meetings [March, May, June]. This would lower the Fed Funds rate to 4.75%, completely reversing the tightening of the last two years," he said.

Copyright January 2001, Crain Communications Inc.

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