High hopes for lower interest rates cause another wild week on Wall Street
Was it the long-awaited end to three years of tight money and high interest rates, or was it a risky short-term maneuver by the Federal Reserve Board to bolster the alarmingly depressed U.S. economy? Would interest rates continue falling or would they soon begin inching up again? Those were some of the questions businessmen, investors and economists asked last week as the stock market leaped then lurched, and interest rates plunged then firmed.
The cause of all the questions was the belief that the Federal Reserve had decided to lower interest rates in an attempt to stimulate economic growth. Discussion about a possible policy change had been building on Wall Street and among economists since midsummer, as analysts looked at the steadily deteriorating economy and worried about a looming depression unless interest rates dropped quickly. Said Steven Einhorn, a vice president and market strategist for the investment banking firm of Goldman, Sachs & Co.: "We reasoned that the Fed would have no choice but to ease up because the consequences of not doing so were simply too serious to contemplate."
Two weeks ago, the Open Market Committee, the Federal Reserve's policy-making group, voted, in effect, to confirm that it was temporarily loosening up on tight-money policy so that the economy could begin growing more rapidly. Said one official somberly: "We could not afford to wait another five or six weeks." Although he insisted that this was only a minor technical change with "zero policy significance," Federal Reserve Board Chairman Paul Volcker confirmed the shift during a weekend meeting of business leaders in Hot Springs, Va.
The effect on Wall Street was stunning. Barton Biggs, chief investment strategist for the Morgan Stanley & Co. investment banking firm, was enthusiastic: "This now raises the chances of a normal recovery, with 6% or 7% real economic growth next year, along with declining interest rates and inflation. In other words, we may end up with the best of both worlds."
As soon as the New York Stock Exchange opened for business last Monday, buy orders poured in by the thousands. At day's end 138.5 million shares had changed hands, driving the Dow Jones industrial average up 25.94 points. For the first time in more than a year, that closely watched index finished above the 1000 level, at 1012.79. As the week progressed, big institutional traders like banks and pension funds were joined by more and more individual investors, who streamed in to catch the action.
But by Thursday, the rally had started to lose steam, sending the Dow Jones index skidding more than 18 points. By week's end the Dow had slipped below the 1000 level, closing at 993. Meanwhile, analysts had begun to warn that little was fueling the buying binge except the fervent hope that lower interest rates would eventually lead to economic growth.