Rating the Rate Cut: Was It What We Needed?

The Fed yesterday announced a large rate cut, bringing the rate down to 2.25 percent–and the backlash already has begun.

  • From NPR: "Fed officials are hoping that by making money
    cheaper to borrow, they’ll encourage investment and keep the economy
    from tipping into a recession — if it’s not already there."

Yet, as NPR points out, that’s easier said than done. In fact,
economist Richard Yamarone of Argus Research believes the cuts are a mistake because making money cheaper isn’t going to fix the mortgage losses that have crippled the economy, hurt confidence in lenders and reduced consumer spending.

Which would explain why the other cuts–at first lauded as a magical solution–didn’t seem to have a huge effect on housing or the economy.

  • The Los Angeles Times worries about the rate cut’s impact on investments, noting that "as the housing market has crumbled and stock prices have slumped, many
    individuals and institutions have been hoarding trillions of dollars in
    safe, short-term accounts such as money market mutual funds and bank
    savings certificates."

Only the rate cuts just made those investments less profitable. Because the rate was cut from 3 percent to 2.25 percent, many savers will earn less than 2 percent on their accounts soon, according to the Times–the lowest return since 2005.

"Two percent is not going to make anyone very happy," Brian
Gendreau, a market strategist at ING Investment Management in New York, told the paper.

However, the Fed’s rate cut could possibly give Wall Street a kick, which it desperately needs. The cut could encourage investment into stocks and longer-term bonds–which could all eventually boost the general economy.

  • And more criticism, from America’s heartland: Wall Street may get a push, according to the Indianapolis Star, from the rate cut–but it could at the same time increase fuel and raw material prices as the dollar’s value sinks overseas.

"There’s sort of a two-edge sword when it comes to cutting interest
rates,” Patrick Kiely, head of the Indiana Manufacturers
Association, told the Star. "Energy prices,
natural gas prices and raw material prices have made some pretty
astronomical jumps in the last 90 days, and they’re driven by the
degradation of the dollar based on interest rate cuts.”

That could cause serious problems in Indiana, which has the largest proportion of industrial jobs of any U.S. state.

Rate cuts have become almost standard in the past year; but are they
really helping? The economy has sunk continuously in the past year. The housing market is
still weak. And just Sunday, the government had to bail out Bear
Stearns with a $30 billion credit line.

The problem: If the Fed tries to fix a given sector with a rate cut, that cut is likely to hurt another sector. There is no blanket solution for our current, many-pronged economic situation. One thing didn’t cause the slowdown; one thing won’t fix it.

So we wonder: Was the cut a good idea? What do you think?