There was talk yesterday the Fed might take rates down yet again later this year. There are two pieces to any Fed move. One is economic, the other psychological.
Economically, even-lower short-term interest rates might help the economy and help the stock market. All those who borrow at ‘one over prime,’ say, would save some a little money as ‘prime’ – currently 4.75% – fell another quarter or half a point. They might spend that extra money on something.
Lower short-term rates would also make stocks relatively more attractive. Even if one hoped for just 5% from a combination of dividends and appreciation – well, 5% looks ever more attractive as your broker pays you, say, 1% on cash balances.
But what would a rate cut say psychologically? That the Fed is worried about the economy? That we are running out of room to cut rates? (The Fed’s ‘Discount Rate,’ at which it lends to banks, is now 1.25%, down from 3.25% a year ago. The ‘Fed Funds’ rate, at which banks lend to each other, is 1.75%, down from 3.75% a year ago.) That it is hard to push on a string? That we are headed toward the Japanese experience, where the government rate fell essentially to zero?
I don’t think we are headed for these kinds of disasters. But it shows you the kind of delicate dance the Fed must do.
(A lot of the problem stems from not having found a way to keep the stock market bubble from ballooning to the size it did. If the NASDAQ was irrationally exuberant at 1250, as Alan Greenspan seemed to think in December, 1996, what was it at 5200 three-and-some years later? I think the Fed made a mistake in not raising the 50% margin requirement – a little-used but venerable Fed lever. Nothing drastic, but a small hike from 50% to 52%, say, or 54%, to send a message . . . and then gradually higher, if needed. It would have been a way of damping down some of Wall Street’s speculative excess without unnecessarily damping down Main Street’s healthy economy.)
There are times when a rate cut is eagerly to be hoped for, an almost sure economic confidence-booster; a shot in the market’s arm. This may or may not be one of them.
Actually, what might be even more welcome is a time the Fed feels the need to tighten a notch. That will be a signal that the Fed, at least, has turned bullish on the economy.
Quote of the Day
On Hollywood Squares, gay comedy writer Bruce Vilanch was asked: You are the most popular fruit in America. What are you? His answer: Humble. (The correct answer? Banana.)~.
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