The Federal Reserve gave the nation an early Christmas present Tuesday, and it couldn't wait to open it.
No sooner had the Fed announced a one-quarter percent cut in the federal funds rate, the interest on overnight loans to banks, than the stock market, down 20 points before the announcement, reversed course and ended up 34.68, gaining back about a third of the 101.52 points it had lost Monday in the biggest one-day selloff in four years.And the euphoria continued in early trading Wednesday, as the Dow Jones Industrial Average was up 24 points at noon.
BancOne, parent company of Bank One Utah, quickly lowered its prime rate from 8.75 percent to 8.50 percent, and other banks followed suit Wednesday. Interest rates had soared Monday on news of the budget stalemate, and the consensus of many economists that the fed would not cut rates on Tuesday.
But Jeff Thredgold, chief economist for KeyCorp, parent company of Key Bank of Utah, was not among the naysayers. He had predicted the quarter-point rate cut on Monday and was looking pretty smart on Tuesday afternoon.
"We stuck with our forecast, so I was glad to see it (the rate cut) come through, even though the market had moved away from it," said Thredgold in an interview at his Salt Lake City headquarters.
Thredgold said many economists had decided the "nonsense" going on between the White House and Congress over the budget stalemate would force the Fed and its chairman, Alan Greenspan, to hold off on easing rates. Thredgold didn't buy that scenario.
"Part of the market weakness Monday was that (investors) thought the Fed would put (lowering rates) off. I think the Fed decided to ease (rates) to avoid more panic selling."
In any case, he said, the move downward was clearly justified.
"As Greenspan indicated, inflation is not a problem in the economy, and the market responded well to what was a surprise move."
And not just stocks benefited. Long-terms bonds "got hammered" on Monday along with stocks, noted Thredgold, down more than 1 point, and then finished up more than a point on Tuesday. "So, we're back where we were on Friday."
But Thredgold does not expect Tuesday's action to mark the end of the party. He has been forecasting a 5 percent funds rate by the end of the first quarter of 1996, so he still expects another one-half percent cut by the end of March.
The Fed next meets at the end of January at which time, said Thredgold, "Our best guess would be we could see some additional easing at that time . . . but I'm not sure they will have to wait even that long. If we had had a budget deal done, the Fed probably would have lowered rates a half-point instead of a quarter."
Thredgold has little patience for the current budget stalemate and the resulting furloughs of "nonessential" federal employees, the second in a month.
"If you look at total spending for the next seven years, they (the president and Congress) are not that far apart - we're talking about a difference of 2 percent. But the president has found he can score political points by talking about how the Republicans are destroying Medicare."
As for the Fed easing of interest rates, Thredgold said some consumer rates, such as mortgages, will likely trend lower.
"We have been saying that if we got this (easing) move, and (saw progress in balancing the budget) that we could test the lows we last saw in October 1993. Right now, we're about a quarter to three-eighths above those lows of three years ago."
The federal funds rate, which the Fed reduced Tuesday from 5.75 percent to 5.50 percent, is the interest rate banks charge each other for overnight loans. The rate is influenced by the Fed and fluctuates daily in the open market depending on banks' demand for cash. It is said to be one of the most sensitive indicators of short-term interest rate direction.
The discount rate, the rate the Fed charges to banks when they borrow money backed by government securities they own, was left unchanged at 5.25 percent. This rate regulates the flow of money into the economy and is said to be more influential than the federal funds rate.
The prime rate is a benchmark for bank loans. Many credit card interest rates are now based on the prime plus a set number of percentage points.