Fed's Small Rate Cut Hurts Bond Prices; Stocks Also Fall, but Dollar Gets a Boost --- Treasury's Long Bond Finishes Off 5/8 Point
NEW YORK -- The bond market gave a cold shoulder to the Federal Reserve's long-awaited move to cut short-term interest rates.</br></br>Bond prices began to slump yesterday morning, shortly after the Fed pushed the closely watched federal funds rate 1/4 percentage point lower to 7.75%. The federal funds rate is the rate banks charge each other for overnight loans. Investors had already factored a cut in short-term interest rates into bond prices, and some were disappointed that the Fed didn't cut rates more aggressively. Others, worried about inflation, complained that the Fed shouldn't have cut rates at all.</br></br>The Treasury's benchmark 30-year bond ended 5/8 point lower, a loss of $6.25 for a bond with a $1,000 face amount. The issue's yield, which moves in the opposite direction of its price, rose to 8.83% from 8.75%.</br></br>Nonetheless, the Fed's modest credit easing could spark reductions in short-term borrowing rates, including the prime rate, which banks use as a base for setting many corporate and consumer loan rates.</br></br>Traders said one reason the Fed's move to cut short-term rates didn't cause bond prices to rise, and yields to fall, was that the rate cut had been widely advertised by Federal Reserve Board Chairman Alan Greenspan. Mr. Greenspan had all but promised a rate reduction if a long-term "credible" budget package was passed by Congress.