Federal Reserve & Interest Rates

Investors are still waiting for a definite rise in stocks to result from last week’s surprise rate cuts. It is typically a given that stocks will go up after interest rate reductions, but Wall Street is not yet seeing the desired results. This is rather puzzling considering the fact that the cut was the deepest since the early 1980’s.

The stocks fluctuated last week after the cut. There was some rising on Wednesday and Thursday, yet on Friday, there was another dip. The market still hasn’t rebounded to September levels, when the rate cutting campaign began. There is an FOMC meeting tomorrow and Wednesday, and some are expecting further cuts.

Perhaps the rate cuts just aren’t enough. There are extremely tight credit conditions, and consumers are drowning in debt (foreclosures and all). With consumer spending low, businesses aren’t profiting as much. The effectiveness that we have seen in rate cuts of the past didn’t include these pressing factors, particularly the housing decline which has taken a major toll on market performance overall.

The seemingly hasty move of the aggressive rate cut of 75-basis-points last Tuesday shows as the ‘tell tale’ sign that recession is imminent to some economists. Monetary policy takes time, and the rate cuts may not be enough to stave off recession. The effects of these moves probably won’t translate until after the second quarter. These cuts may slow down the impact and soften the blow, but if recession is coming, cutting rates can’t stop it.

Meanwhile, the global markets are faltering. Asian stocks tumbled 3%-7%. In Europe, major indexes were down about 2%.

Analysts are split, as usual, as to whether or not the Fed has been making the right moves. Some say more aggressive rate cuts earlier would have helped more, while others think that the cuts came too soon. The intent of the FOMC was seemingly preemptive in delaying recession, but also appears highly motivated by market performance rather than economic conditions.

At this week’s meeting, further cuts are expected. They will perhaps make a 25-basis-point reduction. If the FOMC does cut rates, it will probably not be as dramatic as the latest cut.