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:
- Why should a cut in short term interest rates influence
stock values so significantly?
- The greatest positive reaction to the interest rate cut
tended to come from non-dividend paying, high-tech firms.
Why?
- 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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