Features

NEW YORK — The Federal Reserve lit a match under the financial thermometer. 

It did so at a time when negative news was piling atop negative news, sending vibrations through the economy and threatening to send an avalanche that conceivably could bury the economy in recession. 

Clearly, the Fed had become nervous about losing its ability to control the slowdown it intentionally created by raising interest rates six times between June 1999 and May 2000. 

At the time, it feared that demands by consumers and producers might tax the economy’s ability to respond, an almost certain precursor of inflation and, eventually, recession. It got what it sought, and more. 

Since midyear 2000, negative news has piled upon negative news. Energy supplies fell and prices rose. Factories slumped. High-tech stocks crashed. Retailers were disappointed with sales. Confidence eroded. 

The general view of things, which had reached an extreme of optimism in which all news was viewed as good news, took a drastic turn. A mania of optimism showed indications of deteriorating into a panic attack. 

For many investors, large and small, professional and amateur, the erosion was seen vividly in Wall Street expectations. Belatedly, analysts who had deemed stocks a buy all year long now issued some sell advisories. 

The advice came too late for millions of investors, many of whom had bought at the January 2000 peak of 11,722.98 in the Dow Jones industrial average. Worse, some had bought at the Nasdaq March peak of 5,048.62. 

By yearend, those averages were down to 10,786.85 for the Dow and 2,470,52 for the Nasdaq – a 39 percent plunge. Worse, the prices of many stocks had collapsed, falling more than 50 percent from their highs. And so went confidence. 

While some viewed the tail end of the decline as the result of investors seeking tax deductions by selling before the end of the year, it persisted into the new year, amid the general worsening of economic news. 

While the Federal Reserve gave indications that it now had become more concerned with recession than inflation, few foresaw that it would lower interest rates by one-half percent, 50 basis points, in one sudden move. 

Nor was the timing widely foreseen, at least by ordinary Americans. What seemed to be a consensus among economists was for a 25 basis point cut at the Fed’s regular meeting just before the end of the month. 

The suddenness of the move might even have provided fuel for worriers, rather than a boost to confidence. Was the economic situation even more dire than foreseen? Was the Fed wary of losing control? 

All the time, however, the nation’s financial engineer, chairman Alan Greenspan, the fellow who braked the overly exuberant economy, was still at the controls, and able to throw the lever the opposite way. The worriers weren’t routed entirely. 

It doesn’t mean the Fed has automatic power to make the economy dance to its wishes, but the quick response of the stock market showed that it had restored at least some small measure of confidence. 

Despite the size of the Fed’s cut, it hardly unloaded its ammunition, and some, especially those who expect the economy to continue downhill toward recession levels, anticipate rates to be lowered by another 75 basis points in the near future. 

There are other possible correctives as well. President-elect George W. Bush has promised to seek a tax cut. While perhaps not as powerful as lower interest rates, a tax cut has enormous psychological value, a remedial shock for the entire economy. 

Social Security might enter the picture. Six years ago, the idea of allowing individuals to invest part of their Social Security withholdings in securities was the political third rail – touch it and die. 

Political thinking in both parties has now come around to believing some privatization of Social Security funds is a possibility, conceivably even this year. For stocks, that could be like found money. 

While recognizing the seriousness of the economic downturn, economist Jim Griffin of Aeltus Investment Management, had already taken a bright view of the future. 

“Don’t confuse an ugly present with the prospect for an ugly future,” he advises. 

John Cunniff is a business analyst and writer for The  

Associated Press