John Lonski, chief economist at Moody's Investors Service, pointed out that in the first quarter of 2001, the market value of assets held by American households slumped an unprecedented 5.8 percent from the corresponding period a year earlier. Not since the 1.4 percent drop that occurred in the third quarter of 1974, during a brutal recession, had the value of household assets declined year over year.
Most of the decline in household assets can be attributed to skidding stock prices. According to the Fed, the value of stocks and mutual fund shares held by Americans fell US$8.7 trillion, or 31.6 percent from the year earlier. The plunge in wealth was partly offset by a 12.1 percent increase in real estate values.
``The Fed realizes that rate cuts may not have an immediate effect in the consumer's pocket,'' said Elizabeth K. Miller, portfolio manager at Trevor Stewart Burton & Jacobsen in New York. ``But they are willing to cut to maintain the psychological effect.''
Additional layoffs could be another factor damaging consumer confidence. On Tuesday, for example, Merrill Lynch said that declining profits might force it to eliminate more than the 3,300 jobs, or 5 percent of its work force, that it has already cut this year. A total of 20,000 Wall Street jobs have been lost in 2001.
``Corporate America is plagued on three fronts,'' Lonski said. ``The worst corporate profitability in 10 years, a stock market that continues to struggle and a plethora of corporate credit rating downgrades. The rate cut moves us in the right direction, but it's not going to remedy what menaces the US economy immediately.''
In its statement, the Fed made no mention of its future stance on rates, but most economists expect additional cuts. ``I think ultimately they will have to cut a little more because the easing hasn't translated to easier financial conditions,'' said Jan Hutzius, senior economist at Goldman Sachs.
But assessing the health of the economy will be even trickier for investors in the coming months, Hutzius said. ``Over the next few months, a lot of indicators now deeply in the red will look somewhat better. But it will be very hard to distinguish between a normal bounce and a true recovery, and I think that's going to keep the markets on tenterhooks.''
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