The Rate Cut is No Longer the Top Storyby Tim Manni
The Federal Open Market Committee (FOMC) will conclude their two-day meeting this afternoon, when countless experts predict the Fed officials in charge of setting monetary policy will trim the Fed Funds rate anywhere from .25%-.75%. With the rate temporarily hovering at one percent, the Fed doesn’t have much wiggle room left. As soon as the Fed Funds rate falls to zero, the central bank will have completely exhausted a particular problem-solving resource that has proven of late to have solved very little. Bernanke and Co. will be forced to develop a new plan of action — that plan, or proposal of action that will likely be hinted at the conclusion of today’s meeting, will be what market observers will be watching most closely.
For months we have continually asked what good another rate cut will do in the current economic environment? Many borrowers’ interest rates may already be at their floors (interest rates on some credit cards can never fall below 13%, for example). The benefit for consumers needs to come from some place else besides a lower Fed Funds rate. The central bank must stimulate and incentify private investors to once again fuel the flow of money. Encouraging private investors, not the government, to restore “normal” functionality back into various market places will restore not only what we have been missing, but could be the key to recovery.
Here’s the million dollar question: How? We already know that allowing lenders to operate with extraordinary spreads has done little to entice both borrowing and lending. It goes back to the paradox that the problem isn’t that there’s no money to lend, it’s the availability. The Federal Reserve needs to construct programs that will target lower long-term interest rates (they have begun to do so), re-establish private investing (recall the Fed’s Nov. 25 announcement) with insurance and guarantees, and tax cuts to provide consumers with a consistent cash flow (consumer spending supports two-thirds of our economy).
Today’s meeting is the Fed’s chance to at least provide some clues for future policy that can once again spur our capitalist system via the markets, instead of through government intervention.