Edmund L. Andrews and M.Grynbaum
The promise of lower interest rates and new federal efforts to stem the financial crisis failed to dispel the fear gripping Wall Street on Tuesday.
Stocks rose at the session’s opening but soon began to fall, and the selling intensified during the afternoon, even after Ben S. Bernanke, the chairman of the Federal Reserve, all but pledged to cut interest rates by the end of the month. The Dow Jones industrial average plunged 508 points, or 5.1 percent, extending a slide of months that has erased a third of its value in a year. In the last five trading days alone, the Dow has lost 1,400 points.
With the flow of credit still tight, investors have fixated on the threat of a serious recession despite the increasingly urgent attempts by policy makers to buttress the markets. Deepening problems in the European banking industry have compounded fears of a worldwide downturn.
“The Fed is just plugging holes in the dam and the water keeps rushing over,” said Michael T. Darda, chief economist at the research firm MKM Partners.
In a somber speech, Mr. Bernanke acknowledged that the financial turmoil of the last several weeks had forced the Fed to downgrade its already gloomy economic forecast for the remainder of this year and reconsider holding its benchmark rate steady.
“Over all, the combination of the incoming data and recent financial developments suggests that the outlook for economic growth has worsened and that the downside risks to growth have increased,” Mr. Bernanke told members of the National Association for Business Economics.
“In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate,” he added — his strongest indication to date that the Fed will cut rates.
Fed policy makers are scheduled to meet on Oct. 28 and 29, and investors had already been betting that the central bank would reduce the overnight federal funds rate by as much as one-half of a percent, to 1.5 percent. But many analysts predict the Fed may act before the next meeting, given the sprawling nature of the credit crisis.
Stocks rose at the session’s opening but soon began to fall, and the selling intensified during the afternoon, even after Ben S. Bernanke, the chairman of the Federal Reserve, all but pledged to cut interest rates by the end of the month. The Dow Jones industrial average plunged 508 points, or 5.1 percent, extending a slide of months that has erased a third of its value in a year. In the last five trading days alone, the Dow has lost 1,400 points.
With the flow of credit still tight, investors have fixated on the threat of a serious recession despite the increasingly urgent attempts by policy makers to buttress the markets. Deepening problems in the European banking industry have compounded fears of a worldwide downturn.
“The Fed is just plugging holes in the dam and the water keeps rushing over,” said Michael T. Darda, chief economist at the research firm MKM Partners.
In a somber speech, Mr. Bernanke acknowledged that the financial turmoil of the last several weeks had forced the Fed to downgrade its already gloomy economic forecast for the remainder of this year and reconsider holding its benchmark rate steady.
“Over all, the combination of the incoming data and recent financial developments suggests that the outlook for economic growth has worsened and that the downside risks to growth have increased,” Mr. Bernanke told members of the National Association for Business Economics.
“In light of these developments, the Federal Reserve will need to consider whether the current stance of policy remains appropriate,” he added — his strongest indication to date that the Fed will cut rates.
Fed policy makers are scheduled to meet on Oct. 28 and 29, and investors had already been betting that the central bank would reduce the overnight federal funds rate by as much as one-half of a percent, to 1.5 percent. But many analysts predict the Fed may act before the next meeting, given the sprawling nature of the credit crisis.
In its latest tactic, the Fed announced on Tuesday morning a new program to buy up parts of the short-term financing market to unlock the flow of credit to businesses.
“These are momentous steps,” Mr. Bernanke said, “but they are being taken to address a problem of historic dimensions.”
Only a few weeks ago, the Fed’s official posture was that the risk of rising inflation was almost as big a concern as the risk of slowing growth and rising unemployment.
But on Tuesday, Mr. Bernanke said the outlook for inflation had “improved somewhat” and made it clear that worries about a recession had now trumped worries about rising prices.
While he noted that energy and commodity prices, a significant burden on American consumers, had declined from their recent peaks, he painted a bleak picture of an economy stalling on multiple fronts. The housing collapse has yet to abate, and the slowdown has now spread to other parts of the economy. Unemployment has been rising, household purchasing power has been eroded by inflation and consumer spending, adjusted for inflation, has been falling since May.
Mr. Bernanke made it clear that the latest round of market turmoil would depress growth for the rest of the year. He said he hoped for a gradual recovery in 2009.
President Bush, trying to sound a note of reassurance, said on Tuesday that the $700 billion financial rescue passed by Congress last week was “bold and necessary” and would eventually work to ease the credit crunch. But he warned that the plan would “take time.”
“We’ll work through this,” Mr. Bush said. “We’re taking aggressive steps. And it’s not an easy problem, no question about it. But I am — I am confident in the long term for this country. I’m confident that the steps we’ve taken are bold and necessary.”
Earlier in the day, Mr. Bush spoke by phone with European leaders, including Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France, who has proposed an emergency meeting of the so-called Group of 8 leaders of industrialized nations. The White House said Mr. Bush was open to Mr. Sarkozy’s idea.
But the question for Wall Street is why none of these extraordinary, precedent-shattering efforts have stanched the selling that has infected the market for five straight days.
“You are getting all the things that you would think the equity markets would respond very favorably to,” said Steve Sachs, director of trading at Rydex Investments. “But at this point it just doesn’t seem to be doing it. It’s the attitude of ‘sell’ — regardless of what the news is.”
Although investors fled stocks, there were signs on Tuesday that the Fed’s latest plan did have a positive impact on the troubles in the credit market. The cost to borrow commercial paper overnight fell significantly, and yields on Treasury bills rose, a sign that investors were more willing to leave the safe haven of government notes.
But the Dow, which had lumbered downward from early in the session, accelerated its losses in the final hour and ended down 508.39 points, breaking below the 9,500 mark to close at 9,447.11. The broader Standard & Poor’s 500-stock index fell by 5.7 percent, ending below 1,000 for the first time in five years.
The benchmark 10-year Treasury bill fell 14/32, to 104 3/32, and the yield, which moves in the opposite direction from the price, rose to 3.50 percent, up from 3.45 percent late Monday.
Shares of banks and financial firms shouldered the biggest losses by far, with Bank of America, Merrill Lynch and Morgan Stanley all losing about 25 percent.
Fears about the health of the banking industry were stoked by a disappointing earnings report from Bank of America, which had been perceived as one of the few winners in the current crisis. The bank cut its dividend on Monday and said profits fell sharply.
Late in the afternoon, rumors flew across trading desks that a financing deal between Morgan Stanley and a Japanese bank had fallen through. Shares of Morgan fell more than 30 percent before officials at the bank reassured investors that the deal was, in fact, still on track.
In a sign of how the credit crisis is affecting ordinary Americans, the amount of credit provided to consumers in August dropped for the first time since 1998. Consumer credit declined by $7.9 billion, the biggest monthly drop in more than half a century, according to the Fed.
“Nobody trusts anybody right now,” said Ryan Detrick, an analyst at Schaeffer’s Investment Research.
Others said the market could start to recover when credit starts to flow again. But as long as businesses are forced to scramble for cash — and even states like California and Massachusetts have approached the federal government for billions in loans — the economy will only worsen. That brings the prospect of a deep recession.
“There’s a realization that this problem is much bigger than anyone had thought,” said T. J. Marta, a strategist at Royal Bank of Canada. “There’s a fear that the Fed can’t get its arms around it.”
Asian stock markets were moving sharply lower in early trading on Wednesday in response to Wall Street’s losses. The Nikkei 225 index fell 3.3 percent in Tokyo soon after the opening of trading, after the Bank of Japan added nearly $15 billion to the financial system.
The Standard and Poor’s/Australian Stock Exchange 200 Index dropped 4.3 percent in early trading on Wednesday morning, more than erasing a gain of 1.7 percent on Tuesday, when Australia’s central bank unexpectedly cut interest rates by a full percentage point.
James Chirnside, who manages $65 million at Asia Pacific Asset Management in Sydney, said that investors feared corporate profits would fall and many companies would fail if banks did not resume lending soon. He recommended a coordinated round of interest rate cuts by central banks to unfreeze interbank lending markets.
“Without that sort of global coordination, we’ll still be hostage to these violent moves in the market,” Mr. Chirnside said.
Following are the results of Tuesday’s Treasury auction of 79-day cash management bills and 4-week bills:
Mr. Andrews reported from Washington and Mr. Grynbaum from New York.
Only a few weeks ago, the Fed’s official posture was that the risk of rising inflation was almost as big a concern as the risk of slowing growth and rising unemployment.
But on Tuesday, Mr. Bernanke said the outlook for inflation had “improved somewhat” and made it clear that worries about a recession had now trumped worries about rising prices.
While he noted that energy and commodity prices, a significant burden on American consumers, had declined from their recent peaks, he painted a bleak picture of an economy stalling on multiple fronts. The housing collapse has yet to abate, and the slowdown has now spread to other parts of the economy. Unemployment has been rising, household purchasing power has been eroded by inflation and consumer spending, adjusted for inflation, has been falling since May.
Mr. Bernanke made it clear that the latest round of market turmoil would depress growth for the rest of the year. He said he hoped for a gradual recovery in 2009.
President Bush, trying to sound a note of reassurance, said on Tuesday that the $700 billion financial rescue passed by Congress last week was “bold and necessary” and would eventually work to ease the credit crunch. But he warned that the plan would “take time.”
“We’ll work through this,” Mr. Bush said. “We’re taking aggressive steps. And it’s not an easy problem, no question about it. But I am — I am confident in the long term for this country. I’m confident that the steps we’ve taken are bold and necessary.”
Earlier in the day, Mr. Bush spoke by phone with European leaders, including Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France, who has proposed an emergency meeting of the so-called Group of 8 leaders of industrialized nations. The White House said Mr. Bush was open to Mr. Sarkozy’s idea.
But the question for Wall Street is why none of these extraordinary, precedent-shattering efforts have stanched the selling that has infected the market for five straight days.
“You are getting all the things that you would think the equity markets would respond very favorably to,” said Steve Sachs, director of trading at Rydex Investments. “But at this point it just doesn’t seem to be doing it. It’s the attitude of ‘sell’ — regardless of what the news is.”
Although investors fled stocks, there were signs on Tuesday that the Fed’s latest plan did have a positive impact on the troubles in the credit market. The cost to borrow commercial paper overnight fell significantly, and yields on Treasury bills rose, a sign that investors were more willing to leave the safe haven of government notes.
But the Dow, which had lumbered downward from early in the session, accelerated its losses in the final hour and ended down 508.39 points, breaking below the 9,500 mark to close at 9,447.11. The broader Standard & Poor’s 500-stock index fell by 5.7 percent, ending below 1,000 for the first time in five years.
The benchmark 10-year Treasury bill fell 14/32, to 104 3/32, and the yield, which moves in the opposite direction from the price, rose to 3.50 percent, up from 3.45 percent late Monday.
Shares of banks and financial firms shouldered the biggest losses by far, with Bank of America, Merrill Lynch and Morgan Stanley all losing about 25 percent.
Fears about the health of the banking industry were stoked by a disappointing earnings report from Bank of America, which had been perceived as one of the few winners in the current crisis. The bank cut its dividend on Monday and said profits fell sharply.
Late in the afternoon, rumors flew across trading desks that a financing deal between Morgan Stanley and a Japanese bank had fallen through. Shares of Morgan fell more than 30 percent before officials at the bank reassured investors that the deal was, in fact, still on track.
In a sign of how the credit crisis is affecting ordinary Americans, the amount of credit provided to consumers in August dropped for the first time since 1998. Consumer credit declined by $7.9 billion, the biggest monthly drop in more than half a century, according to the Fed.
“Nobody trusts anybody right now,” said Ryan Detrick, an analyst at Schaeffer’s Investment Research.
Others said the market could start to recover when credit starts to flow again. But as long as businesses are forced to scramble for cash — and even states like California and Massachusetts have approached the federal government for billions in loans — the economy will only worsen. That brings the prospect of a deep recession.
“There’s a realization that this problem is much bigger than anyone had thought,” said T. J. Marta, a strategist at Royal Bank of Canada. “There’s a fear that the Fed can’t get its arms around it.”
Asian stock markets were moving sharply lower in early trading on Wednesday in response to Wall Street’s losses. The Nikkei 225 index fell 3.3 percent in Tokyo soon after the opening of trading, after the Bank of Japan added nearly $15 billion to the financial system.
The Standard and Poor’s/Australian Stock Exchange 200 Index dropped 4.3 percent in early trading on Wednesday morning, more than erasing a gain of 1.7 percent on Tuesday, when Australia’s central bank unexpectedly cut interest rates by a full percentage point.
James Chirnside, who manages $65 million at Asia Pacific Asset Management in Sydney, said that investors feared corporate profits would fall and many companies would fail if banks did not resume lending soon. He recommended a coordinated round of interest rate cuts by central banks to unfreeze interbank lending markets.
“Without that sort of global coordination, we’ll still be hostage to these violent moves in the market,” Mr. Chirnside said.
Following are the results of Tuesday’s Treasury auction of 79-day cash management bills and 4-week bills:
Mr. Andrews reported from Washington and Mr. Grynbaum from New York.
