Nasdaq Spikes as U.S. Cuts Interest Rate for 10th Time in 2001

The Federal Open Market Committee (FOMC) said it had lowered its target for the federal funds rate by 50 basis points to 2 percent -- the more aggressive of the two possible cuts analysts had predicted might occur.

The Nasdaq jumped sharply in the minutes following the news and finished the day up 2.3 percent at 1,835.08. The Dow Jones Industrial Average also spiked, shooting into positive territory after the announcement for the first time on the day and closing up 1.6 percent at 9,591.12.

Little Left To Cut

At the start of 2001, the Fed's target interest rate stood at 6.5 percent. Since then, rate cuts have come once a month on average, and not once has the Fed gone more than two months without a rate cut. The Fed's last rate cut came October 2nd.

The rate is now reportedly at its lowest level since 1961 - and little wiggle room remains for the Fed and its chairman, Alan Greenspan, to continue to try to generate a recovery in this manner.

Risks Remain

"Heightened uncertainty and concerns about a deterioration in business conditions both here and abroad are damping economic activity," the Fed announced in making the cut. "For the foreseeable future, then, 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.

"Although the necessary reallocation of resources to enhance security may restrain advances in productivity for a time, the long-term prospects for productivity growth and the economy remain favorable and should become evident once the unusual forces restraining demand abate."

Nasdaq Teases

Investors and analysts still disagree on whether the rise in the Nasdaq over the past several weeks -- following a sharp drop in the wake of the September 11th terrorist attacks on the U.S. -- will continue or reverse. Since closing at 1,423.19 on September 21st, the Nasdaq has risen 28.9 percent.

Some observers then felt that a relatively positive earnings report from Cisco (Nasdaq: CSCO), in which the tech bellwether signaled that revenue for the current quarter would not decline from the levels of the recently completed quarter, might fuel even more confidence that a long-term upturn in the sector was imminent.

However, the Nasdaq meandered between positive and negative territory in early trading Tuesday, and was moving downward as the moment of the Fed's announcement approached.