Wall Street ready for pause in Fed rate cuts

By Adam Shell, USA TODAY
NEW YORK — A pause in interest rate cuts by the nation's central bank could prove to be refreshing for the stock market.
Investors who once clamored for rate cuts to stabilize a slowing economy and financial system on the verge of a meltdown now are calling for a halt to the Federal Reserve's easing cycle. Wall Street is now of the mind that further cuts would do more harm than good.

The 3.25 percentage-point reduction in the fed funds rate to 2% since September has restored a sense of calm to markets.

But the cheap money has also eroded the value of the U.S. dollar and contributed to an alarming rise in the price of gasoline and food, putting pressure on cash-strapped consumers.

In a statement last week, the Fed hinted that its campaign to lower borrowing costs may be near an end, saying the "uncertainty about the inflation outlook remains high." But it's not just the hope that the Fed can control inflation that has Wall Street wanting an end to the rate-cutting program.

There is a financial motive, as well: Stocks have historically performed very well during "pause periods," when the Fed has stopped lowering interest rates, an analysis by Bespoke Investment Group found.

In the past 50 years, the benchmark Standard & Poor's 500-stock index has rallied 12.3%, on average, in the period from the last rate cut in an easing cycle to the first rate increase. (The S&P is up 2% since the Fed cut on Wednesday, and a total rise of 12.3% would put it just shy of a new high.) The average duration of the Fed's pause in those 12 interest rate cycles in that period was 329 days, or almost 11 months.

Stocks rise when the Fed starts to wean the market off cheap money, because the pause:

•Signals the outlook is brightening. If the Fed no longer sees the need to provide monetary stimulus, it suggests that it is confident the economy is on the comeback trail, says Paul Hickey, Bespoke's chief investment guru.

•Shows lag effect is kicking in. It usually takes six months to a year for the benefits of rate cuts to cycle their way through the economy. Hickey says that when the Fed pauses, it often coincides with signs that the cuts are working.

While those explanations have proved true in the past, circumstances surrounding the Fed's hoped-for pause now may suggest a different outcome for stocks, says Christopher Orndorff, managing principal at money management firm Payden & Rygel.

"Historically, stocks go up because the market assumes the Fed has done their job," says Orndorff. This time, a pause is expected, "not because things are rosy again in the economy, but because inflation is higher than they would like."

Orndorff says the Fed would be in a tough spot if the economy weakens more, because if it is forced to cut again, it could fan inflation. The Fed meets again on interest rates at the end of June.

Retailers bait shoppers with rebate specials

NEW YORK (AP) — Retailers from Safeway to RadioShack Corp. are offering special discounts to lure consumers in and persuade them to spend some or all of their economic stimulus checks, the first wave of which were deposited into bank accounts this past week.
"It's going to be a real war in the stores starting this weekend" as retailers fight to get a piece of the checks, said Burt P. Flickinger III, managing director of Strategic Research Group, a consumer industry consulting firm.

The retailers are all hoping to persuade Americans, worn out by high gas and food prices and the weak housing market, to spend the money rather than save it or pay down debt. Polls have indicated that most recipients plan to use the rebates mainly to buy gas, food and other essentials that have become far more expensive in the past year if they spend the money at all.

That makes convincing shoppers to buy a new dress, flat-screen TV or living room sofa a much harder sell.

"I think the retailer recognizes that they've got to strike while the check is hot," said Marshal Cohen, chief retail analyst at research firm NPD Group. "I think if you're a retailer and you're not trying to entice the consumer, you might as well go back to bed."

The checks and payments are part of a $168 billion tax rebate plan passed by Congress to help spur the lagging economy. Under the plan, individuals who have filed their tax returns for the year can receive up to $600 and families can get up to $1,200, plus $300 per child. The rebates are expected to reach 130 million households. The direct deposit payments began on Monday and paper checks go out May 9.

With sales declining, some clothing and specialty retailers have been cutting prices for months. But this week, a few big names stepped up their efforts to try to turn the stimulus cash into extra sales. Wal-Mart Stores Inc., for example, announced price cuts on everything from cereal to shampoo on Tuesday to coincide with the first round of payments.

"The traffic is certainly busier these days in our stores," said Wal-Mart spokeswoman Melissa O'Brien, although she couldn't be certain the most recent price cuts were the source of the traffic increase. She declined to say whether sales had grown since Monday or whether the marked-down items saw significant gains in the past week.

Other retailers are waiting until the weekend to offer their best deals, since more shoppers will be out on their days off.

CVS Caremark Corp., for example, is offering its loyalty card customers $5 off on a $30 purchase. At Restoration Hardware, shoppers will get $100 off orders of $750 or more through Sunday. Circuit City Stores Inc. is offering an extra 15% off through Saturday.

Flickinger said merchants are already offering weekly promotions or sales timed to events like Mother's Day, but the weekend's sales are meant as an additional incentive to "get consumers who are getting the money to spend it right away in their stores."

He said competition may be most heated at grocery stores where food prices have skyrocketed in recent months due to higher commodity costs. Milk, for example, has jumped to over $4 a gallon.

Grocers including Supervalu Inc. and Kroger Co. are offering a 10% bonus when shoppers use their rebates to buy gift cards. For example, if a customer turns a $600 economic stimulus check into a gift card, the cards would be worth $660.

Safeway Inc. has announced its own plan to give a 10% discount on groceries to Club Card customers who cash their paper checks at the store. That program begins May 14.

Sears Holdings Corp. also is offering a 10% bonus to anyone who converts their check into a Sears or Kmart gift card. That deal also starts May 14.

Other retailers are mailing special discounts to their most loyal customers. Lowe's Cos. mailed an offer Wednesday to its most active shoppers offering $10 off their next $50 purchase or $25 off their next $200 purchase when they turn their checks into its "project starter" cards.

Whether this weekend's sales can convince spend-wary consumers to come back to stores is far from certain.

Bryan Kennedy, a 30-year-old resident of St. Paul, received his payment in his bank account Wednesday and plans to spend part of it on a new set of wheels for his bike. But, he said, the bulk of his check will go toward paying down credit card debt: "I'm going to try to use it responsibly."