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October 29th, 2008

Argument: Rate Cut Won’t Positively Affect Stocks



When it comes to the stock market, investors have been walking on egg shells, cautiously anticipating how to play the volatile ups and downs that come with every new economic or business report, government initiative, or speculative action. For that very reason, the Federal Open Market Committee meeting that’s set to wrap up today at 2:15p.m., may result in a rate cut anywhere from a half to a full percentage point (any cut less than a half of a percentage point has already been forecast as a major disappointment) in order to keep up with the market’s expectation.

Yet, there are some strong arguments that suggest a rate cut would not bring the desired boost to the market that many have anticipated. Some investors have attributed yesterday’s 11% boost to the anticipation of a Fed rate cut — that positive sentiment may no longer persist. Also, investors are quick to the idea that a trimming of Fed Funds rate (already at a low 1.5%) means little impact on consumers:

“Now that you’ve had that rally … I think that most of the steam has been taken out of a post-Fed bounce,” says Mike Burnick, director of research for Weiss Capital Management in Palm Beach Gardens, Fla.

The Fed rate is already at a negative level in real terms–compared to inflation–so other than its sway over the prime rate of lending that affects credit card holders, there’s little real economic benefit until banks ease their lending policies.

As we’ve argued before, the Fed should allow their newly-instated programs to take effect before using up the little amo they have left.

We’ll keep you posted on the Fed’s decision and its impact on both consumers and the market.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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