The Fed (the U.S. Federal Reserve Bank), via the open market operations, helps to manage the swings in the business cycle by monitoring various economic indicators and pulling various levers to flatten-out the bumps. One of these levers, the most important one actually, is the interest rate (the Fed Funds Rate, to be precise).

When the Fed reduces the interest rate, it makes money cheaper - it makes borrowing money less expensive because those who do borrow, pay less interest. You have to ask yourself, however, whether a 0.25% further reduction in the interest rate will stimulate those who have been holding-off on an investment decision (like buying a home or expanding business operations) to suddenly make the leap. The answer is likely no.

The Fed"s actions are likely less important that the reasons for its actions. People watch the Fed to learn of what top economic minds think the economy will do next (or what it"s doing now). With almost 300-basis-points down in the last 9-months, I think that we all can accept that the Fed and all those economic brains think that the economy needs help. We got the message, trust me. Sending the rate lower yet will not drive-home that message any further; moreover, it could cause problems for the Fed in the medium term should it really need to pull on that lever harder, later. It"s going to be interesting to see what the Fed chooses to do; it will be more interesting to see if the markets react at all to whatever it is that they do choose to do!

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3.23 Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved."