NEWSWIRE - April 23, 2001

Topic: Stock Valuation

Source: "Stocks Soar on Fed's Surprise Rate Cut," by E. S. Browning, Wall Street Journal, Thursday, April 19, 2001, page C1.

Synopsis of Article: At 11 a.m. EST on Wednesday, April 18, the Federal Reserve Bank announced an unexpected 0.5% cut in short term interest rates. The rate cut was an effort to reduce the likelihood of a pronounced economic slowdown. The article provides colorful descriptions of the excitement on the floor of the NYSE as the news arrived. The rate cut provoked a rally lifting the S&P 500 by 3.89% and the NASDAQ composite by 8.12%. Several prominent investment advisors comment on the importance of this move by the Fed in getting investors out of cash and back into the stock market.

Questions:

1. Why should a cut in short term interest rates influence stock values so significantly?


2. The greatest positive reaction to the interest rate cut tended to come from non-dividend paying, high-tech firms. Why?


3. The Fed has cut rates several times in recent months. Why was this announcement accompanied by a significant increase in stock values?

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