Fed cuts interest rates again
In response to signs of an economic slowdown, the Federal Reserve (Fed) cut interest rates by half a percentage point on Wednesday, which brings the federal funds rate to 5.0 percent. The Fed's decision to lower interest rates for the second time in January comes as no surprise to investors, who see the nation's economy quickly slipping into a recession.The Fed's action came after the government reported that economic growth slowed to an annual rate of just 1.4 percent in the fourth quarter of 2000. This was the weakest increase in the gross domestic product in more than five years.
Interest rates will have a large impact on students who expect to mortgage their homes after college or borrow money to start a business after they graduate. The decision to lower the federal funds rate, or any interest rate reduction for that matter, is designed to encourage young adults to borrow money toward a home or business.
"On top of the important effects on the economy that this [rate cut] will have, it also makes me feel a little more confident about borrowing money to start my life after college," Tufts sophomore Christopher Goodchild said.
The rate cut came just a day after the Consumer Confidence Index reported a 14-point drop during December, marking the index's fourth straight monthly decline. "Consumers with adjustable rate borrowings will see a reduction in interest payments," George Bicher, an analyst at Deutsche Banc Alex. Brown. "Hopefully that will improve consumer confidence. At least that's what it is supposed to do."
Tech companies see decline in share prices
Technology stocks, as measured by the Nasdaq Composite Index, closed in negative territory on Wednesday despite the Fed's rate cut. The Nasdaq experienced a one percent gain immediately following the Fed's announcement, but quickly slipped 65.62 points to 2772.73. Among the stocks that were hit by Wednesday's decline in the tech sector were AOL Time Warner (AOL), Yahoo Inc., Ask Jeeves Inc., and Amazon.com.AOL, the largest internet media company in the world, posted a loss of $1.09 billion, mainly due to merger-related costs in the last three months of 2000. AOL shares closed down 1.75 to 52.56 on Wednesday, the day of the announcement. Products provided by the company such as MoviePhone.com, Instant Messenger, and various cable networks, are widely used by college students for communication and entertainment interests.
Global Internet communications, commerce, and media company, Yahoo Inc. (YHOO) closed down 2.38 to 37.31. The leading provider of question answering technologies and services, Ask Jeeves Inc. (ASKJ) closed down 0.44 to 3.75. The largest dot-com retailer, Amazon.com (AMZN) closed down 1.63 to 17.31. Products provided by these online companies such as Yahoo! Shopping, Amazon's books, music and DVDs, and Ask Jeeves's question answering services appeal specifically to college students.
International tech stocks slip
The Fed's decision to support the economy with lower interest rates did not help Tokyo tech stocks, which closed lower on Thursday. Sony shares slipped along with most other high-tech issues, dropping 0.12 percent to 8,440 yen.Because Sony has had trouble delivering enough machines, costs associated with PlayStation 2 are draining its profits.
Lowered US interest rates resulted directly in a decline of lending rates in Argentina, which the government hopes will be the key to dragging the economy out of its 30-month lull. Argentine stocks slipped in value on Thursday as well.
Bank and telecom shares led UK stocks to decline on Thursday as investors backed away from the market to analyze the outlook after an anticipated 50 basis point cut in US interest rates.
"At the moment the market does not want to move higher, it is focusing on the potentially negative outlook for the economy rather than the stimulus from the rate cut," said Jeremy Rigg, UK equity manager at Investec Asset Management.
