What if the Fed Cut Doesn't Help?

With news Tuesday morning that the Fed is cutting the Fed Funds rate by three-quarters of a percent, it’s official: Things are worse than they seem with the economy.

The Fed, pushed by shattered worldwide investor psychology, is pulling out all stops to shore up confidence. Treasury chief Hank Paulson went so far as to call this latest cut a confidence builder.

Trouble, as has been pointed out here previously, is the “what if they give a party and nobody comes” syndrome. In this case, what if they do a big-bath cut and it doesn’t help?

I wrote here last month that the Fed did the right thing by cutting just a quarter of a percent a few weeks before the holidays. That would give them a chance to see how the consumer was really doing.

They got the answer pretty fast: The consumer is doing horribly. The value of their homes, especially in the most inflated parts of this country, has deflated. The availability of credit via their homes or other sources has deflated. The value of their 401ks and IRAs has deflated.

As a result, their confidence has been crushed, and it’s unclear how many rate cuts it will take to reverse the trend. The trouble, away from Wall Street, is really quite simple: America has been living out of its means, fueled by a Fed that made credit so cheap that it appeared, at one point, you were getting paid to take the cash. With today’s cut, the Fed Funds rate will fall to 3.50%; last time it was that low was August 9, 2005, when the market was higher than it is today. By contrast, it sank to 1% on June 25, 2003. Mortgage rates, meanwhile, for 30-year loans are averaging 6.33%, still well above their boom levels; ditto for the prime rate.

Here’s the problem: Even if rates once again fall to boom-era levels, credit standards have tightened to the point that even a little bit of sugar won’t help the medicine go down. And don’t go thinking everybody will refinance as mortgage rates slide. Unfortunately, their homes may not appraise out. Batten down the hatches: Ain’t over yet for the bad news — or the Fed.

The beat goes on…

Comments

[David White]

Regardless of whether this helps everone, it definitely will help home buyers, home sellers, and home owners with variable rate mortgages (subprime cases). It may not be a total solution. However, it is definitely a step in the right direction for the short term solution. The markets cannot help but respond positively.
The longer term solution still needs to be worked on (the trade deficit -- especially energy).

[Allen Jones]

If the prospective inflation rate now looks hotter than before, and the Fed is easing into it and at least for now isn't showing signs of reducing the money supply, what you rather own treasuries or bank accounts yielding nil or negative real rates or stock in a company that can raise prices, or even real estate or commodities? Inflation is expedient politically and temporarily its expedient economically.

[lobsterboy]

again HERB GreenBERG adds an yet another article with such a grim view but doesn't really add anything but the obvious. He's done this many times before with multiple stocks as I am sure short following would agree.

Seems like the cut has helped around the world so far, with more cuts in store.

[Zeonman]

The situation is worse than the Fed would have us believe. The rate cuts, the stimulus packages only reinforce this. It stinks of desperation.

[the axe]

you are doomster herb

[the axe]

Herb-come up with something insightful, thanks for pointing out the obvious

[Investor_with_Experience]

Do not Fight the Fed. !
Do not love country or economy. You cannot change economy by yourself.

Buy when Fed owers interest rate (BUY LOW) and sell when he tightens (HIGH)..

[Alpha Seeker]

What if Herb starts reading Marty Zweig or Norman Fosback?
He write articles that will help investors, not scare them.
Rob,
WallastonInvestments.com

[jerry parker]

herb is a puppet for the shorts and has no credibility for anything he says. it's too bad that the SEC doesn't nail him and his hedge fund buddies for colluding and manipulating the markets and specific stocks, ie. put on their short positions and then have "herbie" pump their positions - then they can cover their shorts. time to check out the email and Instant Messages.

[ballsschweaty]

Herb, this is exactly what you said in 2002/2003 right before a massive economic boom took hold.

Only a journalist with as poor a record as you have can stay employed. I still remember your repeated bearish articles on Whole Foods right before it quadrupled.

LOL!!!

[tcsnetwork]

Why are you people bashing Herb for stating an obvious problem with the fed's panic move. He's also right, this will not save the housing market. All this will do is make the dollar drop even further.

buy gold and watch out, because this is going to get ugly

[Robert Nabloid]

I actually wrote about the exact same thing last year when the Fed lowered interest rates - I said it then, a lower interest rate will not stop the economic slowdown. It is worse to lower the interest rates and see little improvement, than to keep the interest rates steady - at least that way you still have those cards to play.

Lower interest rates will only devalue the USD further and cause inflation in the U.S. economy. Ultimately, it is not a good move if you look at things long-term.