What Happened the Last Time Fed Funds Rate was 3%?

The bulls are pounding the table because the Fed cut the funds rate to 3%. I thought it would be interesting to see what happened the last time the FOMC lowered to 3%.

The Fed did so following the tragedy of 9/11. On September 17, the Fed cut by 50 bps.

click to enlarge

On September 17, 2001, the S&P 500 closed at 1038.77. The market proceeded to rise 13.3% to the highs in January 2002. Stocks then moved sideways until June before breaking down, and heading lower. Eventually, the market would bottom at 768.63 on October 10, 2002, with a 34.7% decline from the highs in January, and a 26.0% loss from the close on September 17.

Of course, simply because it happened then does not mean it will happen now. Rather, the point is that because the Fed has been aggressive cutting rates to 3% does not mean the market has bottomed.

Comments

[Solution:]

There were several huge bad event happened at the same time in 2002:
- Enron and WorldCom. People lost confidence in financial market.
- Market at multiple of 25+. NASDAQ at 50.
- Presidential election deadlock.
- and of course, 9/11 was still in effect.

2008 Feb 01 03:33 PM

[steven West:]

no what means the market has bottomed is the fact that most of the housing news is already discounted. for that matter the fact that we are in recession is already been discounted. 9/11 was a singular event with immediate consequences for the market ( strictly speaking in terms of financial loss). the Fed was behind events at that time.
Today is completely different as the Fed is trying to keep up with the curve and many stocks priced this recession in months ago.
you should have done your comparison to the yield curve rather than just the discount rate. Or even the fed model ( yields of bonds vs. Stocks)
I think then you would have seen a very different picture based on past events...
I think we have bottomed. I also think that unemployment remains very low, wages are increasing and companies ( unlike 2001-2002) are cash rich AND P/E ratios are very reasonable- even IF earnings do come down another 10%..... but that has not been the case. Despite the Bears trying to scare us into recession Most companies, ex financials, are beating the street expectations so far.
Frustrating when the bears cant jawbone a recession but there just is not one coming.

2008 Feb 01 08:02 PM

[Zeon:]

Wages aren't rising in real terms. Don't know where you got that. Unemployment isn't very low. It's 4.9%. Consumer prices increased in 2007 the most in the past 17 years and wages declined 0.9% in 2007, the fourth decline in the past 5 years.

2008 Feb 03 08:25 PM

[Zeon:]

Unemployment isn't very low. It's 4.9%. Consumer prices increased in 2007 the most in the past 17 years and wages declined 0.9% in 2007, the fourth decline in the past 5 years. Prices going up and wages down is not a good sign in a consumer society.

2008 Feb 03 08:26 PM

[steven West:]

I disagree. Inflation is moderating and unemployment is VERY low in historic terms.. are you expecting 0% unemployment ????

2008 Feb 04 11:55 PM