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Will it be twelfth time's a charm for US rate cuts?

A trader shouts orders in the Dow Jones futures pit in Chicago. The Dow soared more than 230 points on Tuesday on the anticipation of further rate cuts in the US. PHOTO: AP

The interest rate cut that a growing number of Wall Street firms are expecting from the US Federal Reserve may fail to lift the sagging stock market, some money managers said.

Last year's 11 reductions by the Fed didn't boost stocks, making it unlikely a 12th would help.

While lower rates may reduce the allure of fixed-income securities and help companies boost earnings by reducing borrowing costs, another cut may spark concern that the economic recovery is faltering, crimping investor confidence.

"We have been in a mode of expecting a better economy and now we are questioning that," said Robert Streed, manager of the US$333 million Northern Select Equity Fund. "The Fed would be confirming that the economy is weak if they lowered rates."

Slowing growth in services and manufacturing and weaker-than-forecast job creation have prompted speculation that the Fed will cut the benchmark overnight rate from a 40-year low of 1.75 percent.

The Standard & Poor's 500 Index rose 3 percent on Monday after Lehman Brothers Inc joined Goldman, Sachs & Co and two other Wall Street bond dealers in forecasting a reduction.

Recent history suggests the rally will be short-lived. The S&P 500 has declined 33 percent since the Fed began cutting rates in January 2001. The Dow Jones Industrial Average dropped 22 percent during that period. The NADSAQ Composite Index has fallen by almost half.

"I don't think a Fed cut by itself will cause a sustained, powerful rally in the market," said Tom Angers, who helps manage US$14 billion at Glenmede Trust Co in Philadelphia. "With interest rates already low, I don't think another cut will change the course of the market."

All 10 of the industry groups that constitute the S&P 500 have declined since the Fed cut last year on Jan. 3. Computer-related stocks lost the most, dropping 61 percent as a group.

Lower rates have lifted some industries. Homebuilders such as NVR Inc and KB Home surged as mortgage costs tumbled. Banks that cater to consumers, including Washington Mutual Inc and North Fork Bancorporation Inc, have also gained.

Eight of the 22 firms that trade with the Fed, known as primary dealers, said that they expect the central bank to say at a meeting next week that a slowdown is a bigger risk to the economy than inflation. That would be a first step toward cutting rates, economists said.

Lehman Brothers said the Fed will reduce the overnight interbank rate, known as federal funds, to 1 percent by year-end.

Goldman says policy makers may cut to as low as 0.75 percent.

Those would be the lowest rates since the 1950s.

"I wouldn't be excited if we woke up in December and saw a Fed funds rate at 1 percent," said Brian Pears, head of trading at Victory Capital Management.

"A 1-percent fed funds rate means they don't know what else to do to help this market. If we do get there, that means the economy is lot weaker than a lot of people have thought," Pears said.

A weaker economy -- growth slowed to a 1.1 percent pace in the second quarter -- may heighten concern that corporate earnings will lag second-half forecasts.

Investors said stocks failed to rally after last year's cuts because lower borrowing costs didn't solve the problems created by the collapse of the technology-fueled bull market of the late 1990s.

A glut of telecommunications and computer gear caused companies to pare spending. Some companies didn't take advantage of falling borrowing costs because their debt levels were too high, investors said.
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