Fed rate cut might have little impact

John W. Schoen Senior producer • Profile • E-mail

The Federal Reserve's interest rate-setting committee announced Wednesday that it was lowering its target overnight rate by a half-percentage point to just 1 percent.

But as central bankers continue to wield a wide variety of monetary tools these days, the rate cut might not make all that much difference. For now, the rate-setting policy that has historically been one of the Federal Reserve’s bluntest and most powerful instruments looks more like a paring knife.

Since the credit crisis took hold of financial markets last month, the Fed has tried almost everything, including paying hundreds of billions for mortgage-related investments, commercial paper and other assets no one else wants.

The latest cut in the overnight lending rate for banks is almost ceremonial. While it might help boost morale a bit, some analysts suggest the Fed should stay on the sidelines and retain the ability to cut rates in the future if needed.

“It doesn't matter what the Fed does,” said Rich Berg, chief executive officer of Performance Trust Capital Partners, a Chicago-based bond trading firm. “The market rates are going to be the market rates. Why waste the bullet now? Why not save those bullets?”

But others say the largely symbolic move is still important.

“The sentiment of investors, of consumers and everybody that's involved in this country is at a low,” said Peter Costa, a stock trader at Eckhart & Co. “We all know that it's not going to make any difference in the credit markets. But it is going to be something that's going to be significant that the government is still being proactive.”

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The widely expected cut in the so-called federal  funds target will have little impact on the actual short-term cost of borrowing by banks, though some businesses and consumers may catch a slight break if they borrow at variable rates tied to the target.

In normal times, the Fed manages the interbank lending rate through the purchase and sale of Treasury securities to add or drain cash to the banking system. But with the financial storm raging, the Fed has had mixed success keeping monetary policy on course and hitting that target rate. As a result, financial markets already have cut short-term rates for the Fed.

“They could go more, because the actual fed funds rate is already much lower than the targeted fed funds rate,” said former Fed Gov.  Robert Heller.

Cutting the fed funds rate to 1 percent matches the lowest level reached during the housing boom and naturally raises concerns that the Fed may be repeating a mistake that led the way to the current crisis.

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