U.S. Market January 3, 2001

On the theory that surprises make the best medicine the Federal

Reserve shocked the markets today with two unexpected rate cuts, 50 basis points in the fed funds rate and 25 points in the discount rate. Timed to gain maximum effect, the announcement came during lunch with a floor largely empty of traders at the New York Stock Exchange. The Fed statement cited the weakening American economic picture as the primary rational for the move. With the relative weakening of the United States economy versus the euro-zone the chief reason for the rise of the euro over the past two months this Fed move prompted serious profit taking in the eur/usd. It fell over two figures on the news and its repercussions. The equities, particularly the Nasdaq commenced powerful afternoon rallies on the announcement. The Nasdaq closed up over 14% and the Dow over 2.5%. Usd/jpy was dragged down by eur/jpy slippage and the Fed admission that robust growth in the American economy is, for the moment at least, over.

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