Stocks Finish Mixed After Fed Rate Cut

Tech stocks nudged higher while the Dow slipped a bit after the Fed eased by 25 basis points -- an amount that many considered too small

Stocks finished mixed on Wednesday after the Federal Reserve showed a more tempered stance toward economic easing by cutting short-term interest rates 25 basis points, its sixth rate cut since the beginning of the year.

The Fed's policy-setting arm, the Federal Open Market Committee, announced the interest rate cut around 2:15 p.m. EDT. Though policymakers let up on their aggressive easing stance, this cut, along with five rate cuts since January, has pushed interest rates down by 2.75%, to 3.75%. The discount rate was also lowered 25 basis points Wednesday to 3.25%.

The Fed said in its announcement: "The patterns evident in recent months--declining profitability and business capital spending, weak expansion of consumption, and slowing growth abroad--continue to weigh on the economy." The rate-setting team is still confident that inflation is contained and remains worried that "risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future."

Analysts said the language in the Fed's statement is consistent with the last several policy decisions but the size of the cut did not match the central bank's concern. "The Fed didn't do enough. The market is going down the tank in the near term," says Dan Veru, vice president of Palisade Capital. "Everything they are saying is consistent except for how much they cut. Meanwhile we're in a world of hurt with no demand and no stimulus."

Veru expects more rate cuts, but fears the Fed dropped the ball this time around. "We need it now -- not the next time the FOMC meets." The rate-setting committee's next meeting is on August 21.

"We expect one more 25 basis point cut, probably in August," says David Blitzer, chief investment strategist at Standard & Poor's. "But the outlook depends on upcoming reports on employment and NAPM (National Association of Purchasing Managers). The market can now return to worries about earnings."

The bigger concern is that rate cuts, whose beneficial effects have yet to be felt, may not be enough to stimulate an economic recovery. The major stock indexes are at lower levels now than they were before the first rate cut on Jan. 3. "Greenspan has been cutting since January, and it hasn't done anything for anybody," Hank Herrmann, president and chief investment officer of Waddell & Reed Financial told S&P's AdvisorInsight. "The real problem is earnings, and I don't think we are through adjusting to a deteriorating earnings environment."

Investors had initially sold off stocks modestly, but losses on the Dow Jones Industrial Average were contained at 37.30 points, or 0.36%, to 10,435.18. The Nasdaq Composite added 10.13 points, or 0.49%, to 2,074.75. Meanwhile, the broader S&P 500 index lost 5.69 points, or 0.47%, to 1,211.07.

Treasury Market

U.S. Treasuries finished mixed after the FOMC's decision to cut rates by a quarter point this afternoon. The shallower rate cut puts the end of the easing cycle in sight. Tomorrow traders will look at unemployment claims for the week of June 23. Economists at S&P's research unit are looking for a rise to the 405,000 level. The expected rise in claims would mark the sixth consecutive week that claims have been at or above the 400,000 level, the first such streak since 1992.

World Markets

European stock markets ended mixed on Wednesday ahead of the 25 basis point rate cut by the U.S. Fed. In London, the Financial Times-Stock Exchange 100 index closed higher by 52.20 points, or 0.94%, to 5,607.90. In Germany, the DAX Index fell 14.69 points, or 0.25%, to 5,833.10. In France, the CAC 40 fell 33.01 points, or 0.65%, to 5,057.72.

Asian stocks finished mixed as investors anticipated the size of the Fed's rate cut. Japan's Nikkei index shed 149.84 points, or 1.15%, to 12,828.98. In Hong Kong, the Hang Seng index added 42.24 points, or 0.33%, to 13,004.21.

By Amy Tsao in New York

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