One Year Ago: A Cure For Interest Rate Jitters

Originally published on January 5, 2000 and brought to you today as a time capsule.

Stocks plummeted yesterday, as fears of rising interest rates depressed blue chips for a second straight day and also motivated some investors to take profits from high-tech stocks.

At one point in afternoon trading, the Dow Jones industrial average was down 307.77, the Nasdaq composite index had skidded to 173.03, and even the E-Commerce Times’ E-Commerce Stock Index had fallen 5.65.

Stockholders continued a sell off that began Monday as the market became concerned that, now that worries about the Y2K computer bug have passed, the escalating economic growth in the United States will prompt the Federal Reserve to raise interest rates.

Many investors now believe that the Fed will raise interest rates at its next meeting on February 1st and 2nd. The Fed left rates unchanged at its last meeting, hoping to ensure monetary stability while Y2K concerns played out around the world.

Long Term Prognosis

Even though the investors who are selling off in the e-commerce sector may be temporarily suffering from the jitters, I do not think that the Fed’s impending interest rate increase will put a damper on this segment for very long — even if the hike becomes a reality.

For one thing, it seems to be the nature of online businesses to be optimistic, even when shares are declining and they are bleeding red ink. Therefore, I have confidence that e-tailers will continue to expand, regardless of a temporary downturn. Plus, when all the final figures on this holiday season come in, there are bound to be more success stories like America Online’s US$2.5 billion marketing blitz.

Awash With Venture

Still, for the sake of argument, let’s look at the worst case scenario: The Fed decides to raise the prime interest rate by a full point. Rates would remain extremely low and the economy would still be awash with venture capital in search of a return.

History shows us that most financial catastrophes are not caused by one factor alone and are usually triggered by a combination of negative developments.

Indefinite Moratorium

For instance, if our political leaders really wanted to make sure that the current economic jitters quickly fade into obscurity, they would simply declare an indefinite moratorium on Internet taxation.

If they have the foresight to follow this course of action, I predict that — interest rate hike or no interest hike — Wall Street will skyrocket out of its current slump.

Of course, my solution assumes that this group of bureaucrats really cares about the long-term health of the new economy. So far, they have not shown much evidence of that position.

Let’s hope that they are not so misguided as to begin taxing the Internet at the same time that interest rates begin to climb.

What do you think? Let’s talk about it.

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