Small caps edge up after Fed trims rates
As widely expected, the Fed trimmed the fed funds rate by 25 basis points to 2%. It is the central bank’s seventh consecutive cut in the key interest rate since September, when the Fed first began battling the credit tempest. The discount rate was similarly lowered by 25 basis points to 2.25%.
In justifying the decision, the Fed said economic activity remains weak because of subdued spending and a soft labor market. The Federal Open Market Committee voted 8-2 to bring its target rate to its lowest since December 2004.
"The Fed is clearly still willing to risk inflation over growth at this point. I think this is a mistake as holding off from cutting would've given them room to cut later should they need it and would've cooled some commodity inflation," Andy Busch, global foreign exchange strategist for BMO Capital Markets, said in an email. "The 8-2 vote shows opposition to the easing remains within the board."
Small caps treaded water briefly after the Fed decision, but are beginning to rise in afternoon trading. At 2:45 p.m. ET, the Russell 2000 (NYSE:IWM) was up 4.93, or 0.69%, at 723.86.
This morning, it was reported that the U.S. economy grew at a slothful 0.6%, just dodging negative growth — an “official” recession signal. GDP came in slightly better than the 0.5% economists had forecasted. While official definition of a recession definition is two consecutive quarters of negative GDP growth, the United States has experienced two quarters of extremely sluggish growth and the U.S. economy is clearly struggling as consumers grapple with tumbling housing values, rising energy and food costs and a soft labor market.
In other economic news, the Chicago Purchasing Manager’s Survey, which came out at 9:45 a.m. ET, was slightly above expectations at 48.3 and appeared to have very little impact on equity market trading.
Also out this morning, ADP’s national employment report showed an increase in private sector jobs of 10,000 in April. The Employment Cost Index came in at 0.7%, which was slightly off the forecast and appeared to have little impact on trading.
Among small-cap issues, RadiSys Corp. (Nasdaq:RSYS) jumped about 19% in afternoon trading on earnings while Advanta Corp. (Nasdaq:ADVNB), one of the nation’s largest credit card issuers, reported better-than-forecasted first-quarter earnings and leapt 15%. Sucampo Pharmaceuticals (Nasdaq:SCMP) gapped higher and was up 16% on FDA approval for a drug to treat constipation.
On the downside, LandAmerica Financial Group Inc. (NYSE:LFG) sunk 15% in afternoon trading after the title insurance underwriter reported a wider-than-anticipated first-quarter loss after Tuesday’s close and slashed 325 jobs. Hutchinson Technology Inc. (Nasdaq:HTCH) also skidded 15% midday after reporting a wider fiscal second-quarter loss and being downgraded.
In afternoon trading, the U.S. dollar is down to $1.56 versus the euro.
"No tough love from Bernanke & Co. yet on inflation nor on the economy," Busch said. "[The] U.S. dollar should get beat up."
