January 3, 2001: The Last Time The Fed Cut Interest Rates By 50 Basis Points

September 18, 2007 at 6:14 pm  ·  Category: Market Commentary

I just did a little interesting historical homework and researched the market reaction to Greenspan’s intermeeting rate cut on Wednesday January 3, 2001 from 6.5% to 6% – the last time the Fed cut the Federal Funds rate by 50 basis points.

Like today, the market had a huge up day the day of the rate cut with the Dow up 300 points or 2.8%, the S&P 5.01% and the Nasdaq, the market leader for the end of this last bull market, up 325 points or 14.2%.

But the market sold of substantially on Thursday and Friday as investors came to think about what it meant about the state of the economy for the Fed to be taking such drastic action.

Further, the market was flat and then down in the weeks and months following the 50 basis point cut (2001 Chart).

*****

Also interesting, the parallels between the Fed’s evolving perspective on the economy then and now are striking

A Wall Street Journal article from Jan 4, 2001, “Fed’s Surprise Move Sparks Rally, Sets Off New Jitters About Economy” (subscription required), details how at their meeting in November 2000 after the election the Fed was still primarily concerned with inflation and the possibility of reigniting a stock market bubble.  The FOMC Statement for the Nov 15 meeting said in part “the risks continue to be weighted mainly toward …. inflation pressures”.

However, over the course of November and December the Fed became increasingly concerned about the deteriorating state of the economy, shifting its outlook at its December meeting toward the view that recession was now a greater threat than inflation and leaving the door open for rate cuts.

Posted by Greg Feirman  ·  Trackback URL  ·  Link
 
No Responses to “January 3, 2001: The Last Time The Fed Cut Interest Rates By 50 Basis Points”
  • But between 2001 and 2007, the next Fed cut, the markets have increased by how much exactly?

    Ben  ·  Sep 20, 2007 at 9:58 am  ·  Permalink
  • Ben,

    The Dow closed around 10,700 on Tuesday Jan 2, 2001 – the day before the Fed’s 50 basis point cut.

    Currently, the Dow is trading around 13,800 or 29% higher.

    Over the 6.75 year period that represents an annualized return of about 3.85% over the period Jan 01 – Sept 07.

    *****

    I take it you are a long term investor and so your point is that worrying about short term fluctuations isn’t the right thing to do because, long term, the market will be higher.

    But I think this analysis shows that if you can time the market, even somewhat accurately, your returns can be much better.

    For example, had you sold when the Fed cut by 50 basis points in Jan 2001 and waited out the recession and bear market and got back in, say, in the middle of 2003, after the Dow had already turned up significantly, you could have saved yourself a 16% loss in capital from Jan 01 – June 03 and then returned an annualized 10.6% over the period July 03 – Sept 07.

    In this case, your overall return from Jan 01 through Sept 07 (assuming a 4% money market return from Jan 01 through June 03) would have been 69% compared with the 29% you get from holding through the bear market.

    Interesting yeah?

    Greg Feirman  ·  Sep 20, 2007 at 10:16 am  ·  Permalink

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