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By John Crudele | 28 October 2008
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1. The truth: Today's Fed meeting really isn't all that important.
While it's true that the Fed may drop its so-called federal funds rate to 1 percent from 1.5 percent, the move is really not very important to you and me. The interest rate at which you and I would borrow— if we were so inclined— is controlled by the financial markets, not the Fed. And our borrowing costs are likely to rise until investors get less scared about the world's finances.
2. The discount rate could also be cut. This is what the Fed charges banks for overnight loans.
The importance of a discount rate reduction at this week's gathering has also been muted because the Fed is already making money available to any financial institution that needs it, for just about any length of time. The price of that money— or the discount rate— isn't really important. It's like a soup line from the 1930s. Banks are lining up and the Fed isn't really asking any questions, except, "How much?"
3. Even if the Fed cut rates and [ALL] borrowing costs drop— which, as I said, isn't likely to happen— that still doesn't mean people will seek out loans.
When consumers were borrowing and spending like mad in the 1990s into this decade, the experts lamented that Americans weren't saving enough. Now that Americans are cutting back and this crisis may turn them into savers, the experts are complaining that they aren't borrowing enough. You just can't please everyone.
4. If the Fed cuts interest rates today, instead of tomorrow, it will be more meaningful for Wall Street and might even result in a nice-size stock rally.
Ben Bernanke's Fed surprised investors with the first in a series of rate cuts last August, but since then he's been very predictable. If he wants to shake things up, a cut one day earlier than anticipated might do it.
5. But then will come the backlash.
If Bernanke were to order up a rate reduction even 24 hours ahead of schedule, the financial markets— after initially rising— would start worrying that the economic situation might be so dire that the Fed couldn't even wait the additional day. The Fed is not only damned if it does and damned if it doesn't, it's also cursed if it does or doesn't when it should or shouldn't.
6. A coordinated rate cut with Europe and Asia would be preferable to us going it alone. And European Central Bank President Jean-Claude Trichet said yesterday that he might cut rates again at a meeting next week.
That would be nice, but the dilemma still remains: Investors will worry that if all central banks are cutting rates together, and so rapidly, then regulators must know something everyone else doesn't. So investors are liable to push rates higher because Bernanke and Trichet want them lower.
7. The same goes for interest-rate cuts that are larger than expected.
Let's say, for instance, that the Fed cuts the federal funds rate by a full point instead of the half— point that is expected. The financial markets will not worry only that the central bank is panicking but also that it is running out of room for more cuts. Technically speaking, rates can't go below zero. But in today's Brave New Financial World, I suppose the government could pay you— rather than charge you— for accepting loans. What if there's no rate cut this week? You don't want to know.
8. The economy really is sick.
Washington will report its initial third-quarter GDP figure later in the week and it'll likely show that the US economy contracted. There will be a lot of chatter about recessions, which most people still think is defined by two straight quarters of negative GDP. But that's really not the definition of a recession. A recession exists when the 'non-partisan' National Bureau of Economic Research declares one.
9. There are no good signs yet in the economy.
Everyone was cheering yesterday when the Commerce Department announced sales of new one-family homes had increased an unexpected 2.7 percent in September. But that number is really a lie. Sales on a seasonally adjusted basis increased. But if you look at the 'raw' data without the guesstimating, the Commerce Department says sales dropped 5.3 percent— from 38,000 in August to 36,000 in September. And even that number is suspicious, since the survey that the government conducts is so small that it has a margin of error of plus-or-minus 12 percent, so the 'true' raw sales figure is actually within a range of -17.3% to +6.7%!
10. Last, but not least, let's discuss the stock market.
Everyone is looking for stocks— down about 40 percent so far this year— to suddenly reach the bottom of their decline and then spring right back. It's the trampoline theory of investing. That's why so many people I'm speaking with are deciding to wait out the current market 'volatility'. But what happens if stocks hit bottom and stay there— perhaps for years? That's exactly what could happen if investors get shell-shocked enough.
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