By and  on December 17, 2008

The Federal Reserve threw fiscal caution to the wind Tuesday, lowering interest rates to practically zero as consumer prices sank a record-breaking 1.7 percent in November and all signs pointed to a worsening of the yearlong recession.

Although economists said more will need to be done to get the nation’s finances fixed, investors reacted positively to the no-holds-barred approach to monetary policy and pushed the Standard & Poor’s Retail Index up 5.3 percent, or 14.38 points, to 285.36. Retail shares outperformed the Dow Jones Industrial Average, which closed up 4.2 percent, or 359.61 points, to 8,924.14 largely because of a post-rate-cut rally in the afternoon. Unlike many afternoon rallies in the last few months, this one held up as the final bell approached. [For a chart of the day’s biggest gainers and losers, see page 12.]

The Federal Reserve Open Market Committee, led by Fed chairman Ben Bernanke, was unusually blunt in its statement on interest rate policies, which is very closely read by Wall Street.

“The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” the committee said.

The benchmark federal funds interest rate, used when banks lend to each other, was cut to a target range of zero percent to 0.25 percent from the previous target of 1 percent. In practice, the interest rate was already well below the previous target as banks have limited lending.

The committee noted the deterioration in the labor market and signs that consumer spending, business investment and industrial production have all slackened since the last meeting in October.

Financial markets are still “quite strained” and credit is “tight,” said the committee, which noted, “weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”

“The [committee] is making no bones about how severe this situation is,” said Bill Rhodes, chief investment strategist at Rhodes Analytics.

Rhodes said the move could lead to inflation and a weaker dollar next year, but likened the Fed’s role to that of a trauma doctor, who first and foremost seeks to stabilize the patient.

“They’re doing the least amount of harm they can and trying to keep the system going,” Rhodes said. “Later on they’re going to have a problem and they just have to deal with it when it arises.”

In addition to lowering rates, the Fed plans to purchase debt and securities to support the mortgage and housing markets and is considering buying up longer-term Treasury securities. The central bank will also continue to look at ways it can use its supply of money to prop up credit markets and the economy.

“The problem facing the economy is not an interest rate problem, it’s a lending problem,” said Michael Niemira, chief economist and director of research at the International Council of Shopping Centers.

“The credit risks are very high and banks are not willing to take on a lot of risky loans, and now everything looks far more risky with the recession,” Niemira said. “We need to see the economic cycle turn up, but that can only turn up first by having your financial house in order. It’s a catch-22 for banks.”

For now, falling prices have given the Fed leeway to lower interest rates, which tend to spark inflation.

Despite the fall in November from October, the largest on record for a single month, prices for all goods and services were up 1.1 percent compared with November 2007, according to the Labor Department’s Consumer Price Index. Consumer prices fell 1 percent in October and were flat in September. The so-called core prices, which exclude the more volatile food and energy sectors, were flat in the month-to-month comparison and increased 2 percent year-over-year.

Apparel prices bucked the November trend, rising a seasonally adjusted 0.3 percent compared with October and remaining flat year-over-year.

Retail prices for women’s apparel increased 1.1 percent in November, but fell 1.7 percent from the same period a year earlier. However, men’s apparel prices dropped 1.7 percent month-to-month and dipped 0.4 percent year-over-year.

Price decreases weren’t as bad as expected given the deep discounting at retail in November, said Malinda Harrell, an economist with the Labor Department, but a late Thanksgiving bumped some of the declines into the next month. Women’s apparel prices increased more in November than they do typically for the period, although this could be an anomaly due to the timing of the holiday and new merchandise arrivals, she said.

The overall plunge in consumer prices in recent months is largely attributable to falling gas and transportation costs, said Charles McMillion, president and chief economist, MBG Information Services.

Prices fluctuated within the women’s apparel category, as they have for the past few months. Women’s outerwear prices dropped 0.1 percent in November, but increased 2.7 percent from the same period a year ago. Dresses increased 0.7 percent for the month, but dropped 1.4 percent from November 2007.

Women’s suits and separates increased 0.5 percent month-to-month and fell 3.5 percent year-over-year. The broad underwear, nightwear, sportswear and accessories category showed a 2.1 percent increase in November prices and a 0.8 percent advance year-to-year. Girls’ apparel prices fell 1.5 percent from the previous month, and increased 0.2 percent from the same period a year ago.

Prices within the men’s apparel category indicated a mixed trend as well. Prices for men’s suits, sport coats and outerwear fell 2 percent in November and 3.2 percent year-over-year. Men’s furnishings dipped 0.4 percent month to month, but spiked 3.9 percent in the 12-month comparison.

Shirt and sweater prices dropped 1.7 percent for the month and fell 1.9 percent from a year earlier levels. Pants and shorts prices dropped 2.3 percent from the previous month, and dipped 1 percent from the previous year. Boys’ apparel prices increased 2.4 percent in November, but dropped 1.2 percent year-over-year.

In the stock market, the interest rate cut helped retailers and suppliers regain some lost ground.

Among the biggest winners were Charming Shoppes Inc., up 14.8 percent to $1.71; Pacific Sunwear of California Inc., 12.5 percent to $1.80; Aéropostale Inc., 10.4 percent to $16.92; Charlotte Russe Holding Corp., 11.9 percent to $6.01; Chico’s FAS Inc., 10.9 percent to $3.77; Bebe Stores Inc., 8.4 percent to $6.62; Nordstrom Inc., 8.2 percent to $13.13; Hot Topic Inc., 8 percent to $8.26; Kohl’s Corp., 7.5 percent to $37.44; Ross Stores Inc., 7.3 percent to $29.58, and Abercrombie & Fitch Co., 7.1 percent to $21.85.

Among vendors, Polo Ralph Lauren Corp. was up 10.3 percent to $47.12; Jones Apparel Group Inc., 8.1 percent to $5.46; Phillips-Van Heusen Corp., 7.8 percent to $19.32; G-III Apparel Group Ltd., 7.3 percent to $5.30, and Liz Claiborne Inc., 4.8 percent to $3.03.

After the market’s close, Claiborne, having paid a quarterly dividend of slightly more than 5.625 cents a share on Monday, said it would suspend its dividend payment to shareholders indefinitely.

“Given what is going on in the world, and the retail sector in particular, we have made the difficult but necessary decision to suspend our dividend,” said Kay Koplovitz, chairman. “Halting our dividend is an important way to enhance our financial flexibility and support the work that [chief executive officer] Bill McComb and the executive team are doing.”

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