Financial stocks failed to gain ground after the Federal Open Market Committee lowered both the federal funds rate and the discount rate by 50 basis points, to 5.5% and 5%, respectively.

The American Banker index of the top 50 banks ended down 0.8%, and its index of 225 banks lost 0.88%. The especially interest rate sensitive thrifts also sold on the news, sending the American Banker thrift index down 2.21%. The Nasdaq composite index and the Standard & Poor's 500 index also lost 2.31% and 0.56%, respectively.

Bruce E. Simmons, head trader at Sandler O'Neill & Partners, said that a 0.5% reduction was priced into financial stocks already and that some market participants might have counted on an even more aggressive 0.75% cut.

But Nancy Bush, a bank analyst at Prudential Securities, said that such a move would have been alarming. After weeks of strong gains, investors realize that weaker consumer confidence could put pressure on bank revenues, she said. "We have to worry about loan growth and credit quality."

The cut came after yet more data showing slower economic growth.

On Wednesday the Department of Commerce reported that gross domestic product grew at a 1.4% annualized rate in the fourth quarter, down from 2.2% in the third quarter. Fed chairman Alan Greenspan had told the Senate budget committee on Jan. 25 that GDP growth could be near zero.

For now, few economists expect actual contraction in the economy.

"We continue to believe the economy will avert a recession, despite the weakness in manufacturing," Merrill Lynch & Co. economist Karen Dexter wrote in a note. "Other sectors, particularly housing, have remained resilient."

But even the rapid reductions in interest rates will probably not have a meaningful effect on the economy this or next quarter.

"Since monetary policy works with a lag - an incubation period - today's cut in the interest rate will help the economy later this year or early next year," said Wells Fargo economist Sung Won Sohn.

Meanwhile, Andrew Collins published a note on Citigroup Inc. after visiting with the company's senior management. Reiterating his bullish perspective, he raised his per-share earnings estimate by 5 cents, to $3.15, for this year and by 10 cents, to $3.55, for 2002.

Mr. Collins attributed his revision to an improved outlook on card revenues and Citi's acquisition of Associates First Capital.

Catherine Murray of J.P. Morgan Securities did not share Mr. Collins' optimism. Quoting declining U.S. business volumes, she lowered her earnings outlook for this year by 8 cents, to $3.10, but kept next year's at $3.50. Citi rose all day and ended up 23 cents, or 0.41%, to $55.97.

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