INTEREST RATE AT LOW POINT IN 4 DECADES
Byline: Vicki M. Young / With contributions from Evan Clark
NEW YORK — In a continued move to lift the economy out of the doldrums, the Federal Reserve on Tuesday cut interest rates for the 11th time this year by a quarter-point, to 1.75 percent, the lowest level in 40 years.
The reduction in rates was anticipated by many, and the markets held steady in midafternoon trading following the announcement of the cut. Interest rates are currently at their lowest since July 1961.
In a statement issued Tuesday, the Fed said: “Economic activity remains soft, with underlying inflation likely to edge lower from relatively modest levels. To be sure, weakness in demand shows signs of abating, but those signs are preliminary and tentative.”
While the Fed statement was more upbeat than when it last cut rates, a half-point cut on Nov. 6, more telling this time was the Fed’s hint that the door was open for further trimming of interest rates. “The committee continues to believe that, against the background of its long-run goals of price stability and sustainable economic growth and of the information currently available, the risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future,” it said in a statement.
Some on Wall Street had predicted that a cut was forthcoming based on weak retail sales and increases in unemployment. Last week, payrolls plummeted 331,000 in November, with the unemployment rate rising 0.3 percent, to 5.7 percent. The unemployment rate is now at its highest level in more than six years.
Maury Harris, economist at UBS Warburg, said in a report that the latest employment data “should leave little doubt that the recession is not over yet.”
Harris expects another Fed rate easing of a quarter-point at the next Federal Open Market Committee on Jan. 29 and 30, bringing rates down to 1.5 percent. “Historically, the Fed keeps easing until the unemployment rate stops rising. And we still expect the unemployment rate to rise further from its recent 5.7 percent November level to 6.2 percent” before the end of the first quarter in 2002, he predicted. The economist also said Tuesday that he doesn’t expect the jobless rate to retreat from his estimated 6.2 percent peak until “very late in 2002.”
The Dow Jones Industrial Average fell 33.21 points, to close Tuesday at 9,888.37, while the Nasdaq gained 9.81 points to finish the day at 2001.93. Among retail and apparel stocks, retailers tended to lose ground, while vendors picked up some gains in trading.
Among the retail issues heading downward were: Federated Department Stores, off 5 cents, to close at $36.48; The May Department Stores Co., off 55 cents, to $33.90; J.C. Penney Co., off 52 cents, to $34.23; Nordstrom, off 28 cents, to $19.03; Ann Taylor, off $1.27, to $28.65; Gap, off 59 cents, to $13.01, and Talbots, off 68 cents, to $32.79. Even Kohl’s Corp. managed to finish down 65 cents, to $68.20. Retail standouts included Hot Topic, closing at $30.86, up 66 cents, and Urban Outfitters Inc., closing at $21.91, up $1.56.
Separately, Investec PMG Capital analyst Holly Guthrie believes Urban Outfitters is set to excel, with current trends playing to its strength in bohemian and peasant looks. The equity analyst on Tuesday upgraded the company’s stock to “strong buy” from “buy.” She noted that, longer term, Urban Outfitters’ accelerated retail expansion and shift toward holding over merchandise beyond a season bodes well for comps and overall profitability. “Having some assortments in the second year of the [fashion] cycle should not be that uncharacteristic for Urban,” she said.
As for Gap, Moody’s Investors Service on Tuesday placed the firm under review for possible downgrade. While poor comps were a drag on operations, Elaine Francolino, a fixed-income analyst at Moody’s, noted they also could be a signal that, generally, a company could be losing share to competitors.
“Fashions introduced over the past year have not been consistently successful and certainly have not gained enough acceptance by targeted customers to offset shortfalls in sales of basics,” noted the analyst.
Moody’s on Monday changed its view on J.Crew’s debt rating to “negative,” based on “a sharp drop-off in sales in October and November,” according to fixed-income analyst Marie Menendez. The firm’s same-store sales fell 24.8 percent last month and were off 15.4 percent fiscal year-to-date. Moody’s maintained its ratings on the group’s debt rated at Caa3 for the $130 million 12.75 senior discount notes due 2008.
Among vendors, the gainers were Jones Apparel Group, up 60 cents, to close at $33.50; Kellwood, up 24 cents, to $22.63; Nike, up 58 cents, to $55; Oakley, up 58 cents, to $14.05, and VF Corp, up 29 cents, to $38.84. Declines were registered at Coach, down 53 cents, to $33.25, and Elizabeth Arden Inc., off $1.15, to $13.35.
Jones Apparel Group will become part of the Standard & Poor’s 500 Index Friday. The jump for Jones was made possible by the consolidation of two other S&P 500 companies.