Investors Anxiously Await Interest Rate Cuts
Today will be the moment of truth, as the Federal Open Market Committee (FOMC) holds the meeting that will determine whether interest rates will be cut.
Ever since the discount rate was cut last month, economists have been predicting this cut. The federal funds rate reduction is an absolutely crucial move, and the timing is now.
Wall street has seen the ill-effects of declines in the UK. With the Dow Jones Industrial Average falling 59.99 points and the Nasdaq Composite Index losing 25.07 points, the shareholder nail-biting begins. There isn’t a shadow of a doubt about the FOMC lowering the federal funds rate (the interest that banks are charged for loans).
The question now is: How much will they lower it?
Fairly new Chairman Ben S. Bernanke has to be very careful with this decision. The rate has not been cut for four years. After the long running of Alan Greenspan as chaiman, Bernanke has his first major influential decision to make.
The repercussions of this decision can make a dramatic impact on the economy, positive or negative. Balancing the rates to fix the credit crunch, while still considering its impact on inflation is no easy task. The amount of the rate cut will determine whether or not our country falls into depression.
Analysts say a half of a percentage rate cut can be just the right amount to keep us out of recession. If the cut is smaller than that, it might help the oil industry, but the economic slowdown would still be a huge risk. Chances are, we a re looking at a rate reduction of a 50-basis point (1/2 %).
It is the popular belief that the rate change will trickle down to the average Joe and his loans. While this might be a help to the economy and bank will certainly benefit, it is not a definite call. The change would help keep the economy out of recession, but it is unclear how this will affect inflation. There is a possibility that the cut could raise inflation, but it is the lesser of two evils (the other being recession).
Economists are betting their bottom dollar on this rate cut, and investors are holding their breath today. Greenspan trusts that Bernanke knows what he’s doing. Hopefully, he does. Someone has to make sure the economy doesn’t go under, and he is in the position to make things right.
September 18th, 2007 at 10:10 am
[…] Angus Robertson wrote an interesting post today onHere’s a quick excerptThe repercussions of this decision can make a dramatic impact on the economy, positive or negative. Balancing the rates to fix the credit crunch, while still considering its impact on inflation is no easy task. … […]