Will The Interest Rate Cut Help?

There are varying opinions as to the effect of yesterday’s ½% interest rate cut. The general view is that it is not a quick fix as MarketWatch noted:

Economists believe that the rate cut will not quickly cure the ailing economy. “Everyone wants a quick fix, but it takes time,” “said Mike Wallace, an economist with Action Economics.

But bringing rates lower right now might not help very much, analysts said, because the effective federal funds rate has already fallen to 1% because of a new Fed policy to pay banks interest on the excess reserves they deposit at the Fed.

“The fed funds rate is almost irrelevant,” Wallace said. “The easing has already taken place.”

But Glassman said that there are some benefits to cutting rates and the Fed must keep trying.

“As long as there are benefits they’ve got to keep trying,” he said.
The lower fed funds rate has helped marginally to unclog credit markets and restore some confidence in markets, but credit remains tight despite the Fed’s moves.

I agree that the rate cut will not have any effect on the consumer at all. Now that the Fed has used some more ammunition by lowering the Fed Funds rate aggressively to 1%, how much lower can they go? The accompanying statement clearly signaled that further cuts are possible. Hmm, can you really see a rate of zero percent?

Wall Street generally likes lower interest rates, because they support the bullish crowd—up to a point. Too low of a rate clearly signals that there are severe economic troubles ahead, which may be an encouragement for the bears to remain in charge.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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