Will the Final Rate Cut Matter?

The key interest rate is expected to be lowered to 0.5%. Although nothing has been finalized or announced, the Fed is expected to lower this rate. Will lowering key interest rates really make that much of a difference?

Experts don’t think so. Instead, they think that it will send a signal to the American people. This signal would mean that the central bank would have to take more drastic and creative measures to pull the economy out of its slump.

When the Feds do cut interest rates for the last time, it will mark the 10th interest rate cut for the Feds and Ben Bernanke. The Federal Reserve has been cutting interest rates sine September of 2007. Some experts think that this will be the last cut. They couldn’t possibly go under 0.5%. However, some others think that the Feds will be forced to lower rates to 0.25%.

Why do the Feds cut interest rates anyways? Federal interest rate cuts usually help the economy. When the Fed cuts its interest rate, banks and other financial institutions are forced to cut their prime rate as well. The Federal interest rate has a significant affect on credit card rates, home-equity rates, etc. Yes, when the Feds drop interest rates, it usually helps out the economy as a whole.

There hasn’t been any significant evidence that shows that federal rate cuts have stimulated the economy at all. David Resler, chief economist with Nomura Securities International Inc. said, I think the Fed is going to cut rates and it’s going to be intended as a signal that the Fed will do whatever is necessary to keep the economy from sliding too deeply in this recession.”

Once the Fed cuts the interest rate this time, there won’t be much room to cut it after that. It isn’t likely that Ben Bernanke will cut interest rates at all after this point.

Kurt Karl, chief U.S. economist with Swiss Re, said, “Once you get rates down to zero, it’s hard to move off of zero. Plus, you’ve made the price of money free and it shouldn’t be. There should be come cost to loans. The Fed may hint that this next rate cut is sufficient. But the other think the Fed will emphasize is that it has more tools, more arrows in the quiver. The Fed’s job is not over just because there may be no more interest rate cuts.”

What else should the Federal Reserve and Ben Bernanke do to stimulate the U.S. economy and bring it out of the depths of this recession?

This entry was posted on Thursday, December 18th, 2008 at 9:59 am and is filed under Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.