Fed Action Disappoints Wall Street

Wall Street was unimpressed by the Federal Reserve's move Tuesday to slash interest rates by a half-point for the third time this year, a series of rate cuts unprecedented in Alan Greenspan's 14-year tenure as central bank chairman.

The question "why not 75?" seemed to sum up the attitude of many investors after the Fed moved to keep an increasingly weak U.S. economic expansion from petering out by lowering short-term interest rates by 50 basis points, to 5 percent, rather than the 75 or 100 basis points hoped for by investors.

Many on Wall Street had advocated more aggressive rate cuts after suffering through a huge sell-off last week that left the Dow Jones industrial average at its lowest level in two years and pushed the Nasdaq to new lows.

Fed Rates and the Dow

The Dow lost another 238.35 points Tuesday to close at 9,720.76. The Nasdaq shed 93.72 points to close at 1,857.46, the lowest close for the index in nearly 2½ years. Most of the selling occurred in the last hour of trading.

"A half-point is better than nothing," said Greg Valliere, chief strategist for Charles Schwab's Washington research group. "But many people feel that for the stock market to really get reinvigorated, the Fed should have done more."

Fed policy-makers did hint at the possibility of rate cuts to come, saying their chief concern continues to be the threat that the economy will fall into recession.

"The risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future," the Fed said in a statement accompanying the announcement on rates.

The Fed governors also approved a 50-basis-point reduction in the discount rate, to 4½ percent.

Investors Still Looking for a Bottom

Wall Street has fretted that a continued market slide would further erode consumer and business confidence, prompting a second wave of the ongoing business slowdown.

The overall economy continues to be buffeted by crosscurrents, with bleak news in one economic sector often followed by reports of resilience elsewhere.

"We've avoided a recession," said Lynn Reaser, chief economist and senior market strategist for Banc of America Capital Management.

Reaser predicted that Tuesday's rate cut would help ease some of the anxiety that caused consumers and companies to tighten their belts. "The cuts will help the economy return to a better track," she said, by encouraging companies to make investments that lead to productivity gains, which in turn produce heftier profits.

It remains to be seen, however, whether Tuesday's Fed action convinces shell shocked investors to return to the stock market.

"While a half-point cut might be enough for business activity, it won't be enough for market psychology," Carl Tannenbaum, chief economist for LaSalle Bank/ABN AMRO told The Associated Press.

Fed Still Looking For a Soft Landing

Today's move continues a series of rapid responses by the central bank to try to keep the nation's record-long 10-year streak of uninterrupted economic growth from ending.

Some observers have criticized the Fed chief for allegedly failing to steer the once-sizzling economy to a soft landing. Greenspan acknowledged in recent speeches that the economy has cooled much more rapidly than in earlier business cycles.

As recently as last fall the Fed was on record as seeing the prevailing economic risks skewed toward inflation. But Greenspan, famous for digesting reams of minutiae from all points in the economy, relaxed his inflation watch and switched to being a recession hawk the moment the new dangers became evident, said Jim Glassman, senior U.S. economist with J.P. Morgan Chase & Co.

"He turned the ship quickly," Glassman said.

But others disagree.

"If ever anyone was a day late and a dollar short, it was Alan Greenspan today," Sen. Byron Dorgan, D-N.D., told The Associated Press following the Fed announcement.

ABCNEWS Radio contributed to this report.