The Fed Rate Cut May Mark the End of An Era--But Will It Help?

The Fed announced a quarter percentage point reduction of its key interest rate today--which may be the last rate cut for awhile.

The federal funds rate is now 2 percent.

The Fed's statement mentioned--as previous ones had--that rate cuts were meant to invigorate the economy.

However, because the statement did not include the phrase "downside risks to growth remain," which had been present in previous statements, and also said that "uncertainty about the inflation outlook remains high," some sources, including CNNMoney.com, are forecasting the aggressive rate cut era is over.

And maybe that's best, since some sources, including Forbes, reported earlier that the Fed was expected to cut its target overnight interbank loan rate from 2.25 percent to 2 percent--but that more cuts may not be enough to heal the weakened economy.

Since September, the Fed has cut the federal funds target rate by three percentage points--it was 5.25 percent. But the effect has been questionable.

Just today, the Commerce Department said that we're facing a slowing economy.

The economy didn't stop in the first quarter--export sales and inventory helped offset housing and other issues and let the gross domestic product increase at a 0.6 percent annual rate. But concern about its future remains.

A few reasons analysts are questioning the rate cuts:

• Since the Federal Open Market Committee's March meeting, the cost of acquiring funds has risen by 0.33 percentage points. Banks remain nervous to lend to each other, Bloomberg says.

• Adjustable-rate mortgages--more tied to the federal funds rate than fixed-rate loans--have fallen just a half a percentage point since September; according to U.S. News and World Report, investors are still leery about buying into the foreclosure-plagued mortgage market, so rates needed to rise to attract buyers.

Higher rates don't help homeowners struggling to make their payments. But U.S. News and World Report says the Fed's cuts have had some influence.

"The truth is that if [the Fed] hadn't cut [the federal funds rate], adjustable rates would be even higher...and the problems would be much more severe," Gus Faucher, the director of macroeconomics at Moody's Economy.com, said in the article.

Maybe. Maybe not. Do you think that's true?

Tell us what you think by posting below...

Comments

[Chris Ford]

Are these rate cuts bolstering short term confidence? Probably. What is the long term impact though? Look at how the Fed handled the last econonic downturn of 2001-2003. A drastic 4 point rate cut was instituted to avoid a naturally occuring portion of the business cycle. Instead of absorbing the pain of that recession it was instead deferred and magnified through a series of unintended consequences. Now awash in "free" money, financial institutions gave away mortgages to anything with a pulse. Brokerage houses conveniently took these dubious loans off the banks' hands and bundled them into complex securities hiding their true nature. 5 years later we're immersed in a mess originating with the arrogance of Alan Greenspan. Not to be outdone, Ben Bernanke intends on outdoing Arthur Burns '70s Keynsian folly. Thank you Ben. These are not errors in a generally functioning market economy, this is evidence that the system itself is broken.