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

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).

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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.