o Fed Fund Rates Cut to 1.0%

The Federal Open Market Committee lowered rates a half point to 1.0% on October 29th, 2008.

The federal funds rate is the interest rate at which a bank lends money to another bank overnight. Interbank loans are a way for banks to quickly raise capital by borrowing from other banks within the Federal Reserve System. Lowering rates is a way to bolster liquidity in the financial system by making borrowing cheaper.

What does a Fed rate cut mean to you?

• People that save cash in a bank savings account, money-market accounts, or purchase a bank certificates of deposits will receive a lower interest income. Bank CDs and money market rates are not tied to the federal fund rates but generally move together.
• Home mortgage rates, auto loan rates, and variable credit card rates could potentially drop.
• The stock market may rise. Monetary policy has some influence on equity prices. However, long term stock prices depend on the future outlook of the economy, not a fed rate cut. The wealth effect of stock prices rising may raise consumption levels.

Bernanke explains in a speech given October 9, 2003:
"We find that unanticipated changes in monetary policy affect stock prices not so much by influencing expected dividends or the risk-free real interest rate, but rather by affecting the perceived riskiness of stocks. A tightening of monetary policy, for example, leads investors to view stocks as riskier investments and thus to demand a higher return to hold stocks. For a given path of expected dividends, a higher expected return can be achieved only by a fall in the current stock price."

In summary, the fed rate cut can be viewed as a last ditch effort to discourage savings, increase consumption, give banks a break when borrowing, and bolster the stock market. Where are we going from here, a 0.00% fed funds rate? Isn't it ironic (don't ya think), after the tech bubble burst, the low fed rate encouraged the conspicuous consumption that has contributed to this mess. So now a zero rate is seen as a panacea for what ails the economy.

The collapse of the financial bubble will defy all attempts to end it. The private sector must at first dig itself out of the debt burden. Long term growth cannot be sustained with consumption financed by debt.