By Anne D. Picker, International Economist,Econoday
Monday, August 19, 2002

Much to no one's surprise, the Federal Reserve left their key fed funds interest rate at its 41-year low of 1.75 percent. The markets initially were disappointed. Investors seem to think that the Fed can fix all of their problems. These would include accounting and corporate malfeasance, terrorism and the continual saber-rattling against Iraq. (The latter pushed crude oil prices up.) Investors don't like uncertainty and need to trust to invest. The Fed continues to call it as it is. The graph below gives a picture of relative key interest rates for major central banks. Only the Bank of Japan, with a zero interest-rate policy, and the Swiss National Bank have rates lower than the Fed. The Swiss have been lowering their key Libor interest rate to combat the rising Swiss franc, which is currently favored by those seeking a safe haven and disappointed by the dollar's recent decline.

The SEC deadline for a first wave of chief executives and chief financial officers to file signed statements swearing to the veracity of their financial data came and went Wednesday and the sky did not fall. Fears that Wednesday would become "restatement day" were unfounded, as the vast majority of senior executives attested to the accuracy of their accounts. Investors were cheered by the lack of surprises and bought equities.

Remember not so long ago when markets were going to be global and trading 24 hours? Investors and market makers have changed their minds for the time being. Nasdaq is pulling out of Japan, leaving its partner Softbank to run their former joint-venture alone. But the market is not dead. The 100 listed stocks will continue to be listed and traded. Nasdaq also runs a similar exchange in London and that exchange does not appear to be in similar peril. There are reasons for not working 24 by 7 and for taking vacations. Now that the great bull has turned lame, perhaps we are discovering reasons for moderation.

Equities were a mixed bag last week. Of the indexes followed here, eight rose and five fell. Early in the week, investors waited for the Fed to act. Their fears were confirmed when the Fed changed their bias from neutral to one acknowledging the slowdown in growth. As usual, the reaction to the Fed took place on Wednesday since most markets were closed overseas by the time the Fed announced its decision. Most Asian and European indexes drooped in response. The recovery in both Asia and Europe has been primarily export oriented. Any weakness in the United States quickly gets translated into slower growth overseas as well. Equities rose anywhere from 0.2 percent (London FTSE 100) to 5.3 percent (Mexican Bolsa). Declines ranged from 1.1 percent (Toronto S&P/TSX composite) to 2.1 percent (Nikkei 225, Paris CAC). Although markets remain volatile, they appear to be calming down some - at least as the summer winds down.

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