Fed cut rate have little effect on market

Wall Street Journal - The Fed is about to give financial markets a placebo.

Federal Reserve policy makers Wednesday are widely expected to cut their target for the federal-funds rate, an overnight bank-lending rate, to 1% from 1.5%, back to its historic lows of 2003 and 2004.

Such low rates should be rocket fuel for stocks, boosting economic growth and corporate profits. Lower Fed rates can help corporate bonds, too, though they typically hurt Treasuries, as investors worry about the potential for inflation.

This time, however, cutting the rate target has all the import of snipping the ribbon on a new construction project.

The fed-funds rate already is well below the Fed's target and has been for most of the past month. Since the Fed cut its target to 1.5% on Oct. 8, the interest rate has traded above that level only once and has been below it the rest of the time. On several days, it has traded below 1%.



The Fed manipulates the fed-funds rate by buying and selling bonds and other securities. Lately, these open-market operations have been on steroids, and the moves, along with some technical factors, have caused the Fed to temporarily lose full control of the funds rate.

Fortunately, that doesn't matter much now. With the world shedding debt and parking cash, money supply is draining from the system, and the Fed's extraordinary efforts are just enough to replace it.

"When a water system fails, the first thing to do is to re-establish pressure in the water lines," says Bruce McCain, chief investment strategist at Key Private Bank, which is part of KeyCorp.

The Fed has little choice but to cut rates Wednesday lest it disappoint market expectations. But until the demand for money starts to rise again in the broader economy, for example when lending picks up, rate cuts will have little lasting effect on markets.