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Discount Rate Cut Half A Point - Now What?
Finally, some good news for a change. On the morning of Friday, August 17, the Federal Reserve approved a one-half point reduction in the discount rate - the rate at which the Fed loans money to its member banks. The new rate will be 5.75%, down from 6.25%.
This is a good thing because the banks should be able to pass some of these interest savings along to consumers and actually stimulate borrowing, or at least alleviate some of the credit concerns currently crippling the marketplace.
But are we out of the woods yet? Despite the fact that the Dow responded to the news by surging ahead more than 300 points just after the open on Friday morning, my answer is still a resounding NO!
In my opinion, the Fed needs to do more, and so do our politicians.
What The Fed Should Do
The Fed can, and should, lower the Fed Funds rate - the rate at which banks borrow from each other, known as the overnight rate. This is important because experts believe this will have the biggest impact on the prime rate that banks charge, and thus on the loan rates of many loans and mortgages. In short, it would help to immediately alleviate some of the credit crunch that Americans are feeling and hopefully stimulate immediate spending and liquidity. (To learn more, see How Interest Rates Affect The Stock Market.)
Of course, I don't expect the Fed to whip out this tool too soon. Typically, it is extremely cautious and conservative in its actions. I think it will wait to see the prolonged reaction in the marketplace to the discount-rate cut before taking any action. Nevertheless, this option should stay on the table.For the record, I'm not alone in my thinking. Goldman Sachs (NYSE:GS) is actually predicting that the Fed will reduce the Fed Funds rate to 4.5% from 5.25% later this year. Let's keep our fingers crossed.
Even though the Fed recently bought some $38 billion in three-day repurchase agreements in mortgage-backed securities, Federal Reserve chairman Ben Bernanke should also be talking to the public about how he plans to add further liquidity into the system. He must begin jawboning now, because, absent his interjection, I suspect investors and consumers will continue to fret.
Also, where are the politicians in all this mess? They keep wrangling over who is right and who is wrong in Iraq, when I would argue they should be proposing tax breaks for small businesses and other job creators.
Don't Expect A Turnaround Yet
I suspect that the novelty of the discount rate cut will probably wear off over the next couple of trading sessions. This one move is unlikely to dramatically turn around the loan portfolio issues that some of the larger lenders including Countrywide (NYSE:CFC) are experiencing. Nor is it likely to stimulate the real estate market by itself, which many American's have become dependent on as a source of liquidity.
The Fed's move is a welcome one, but it is probably not the cure-all that investors are hoping for.
Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!
This is a good thing because the banks should be able to pass some of these interest savings along to consumers and actually stimulate borrowing, or at least alleviate some of the credit concerns currently crippling the marketplace.
But are we out of the woods yet? Despite the fact that the Dow responded to the news by surging ahead more than 300 points just after the open on Friday morning, my answer is still a resounding NO!
In my opinion, the Fed needs to do more, and so do our politicians.
What The Fed Should Do
The Fed can, and should, lower the Fed Funds rate - the rate at which banks borrow from each other, known as the overnight rate. This is important because experts believe this will have the biggest impact on the prime rate that banks charge, and thus on the loan rates of many loans and mortgages. In short, it would help to immediately alleviate some of the credit crunch that Americans are feeling and hopefully stimulate immediate spending and liquidity. (To learn more, see How Interest Rates Affect The Stock Market.)
Even though the Fed recently bought some $38 billion in three-day repurchase agreements in mortgage-backed securities, Federal Reserve chairman Ben Bernanke should also be talking to the public about how he plans to add further liquidity into the system. He must begin jawboning now, because, absent his interjection, I suspect investors and consumers will continue to fret.
Also, where are the politicians in all this mess? They keep wrangling over who is right and who is wrong in Iraq, when I would argue they should be proposing tax breaks for small businesses and other job creators.
Don't Expect A Turnaround Yet
I suspect that the novelty of the discount rate cut will probably wear off over the next couple of trading sessions. This one move is unlikely to dramatically turn around the loan portfolio issues that some of the larger lenders including Countrywide (NYSE:CFC) are experiencing. Nor is it likely to stimulate the real estate market by itself, which many American's have become dependent on as a source of liquidity.
The Fed's move is a welcome one, but it is probably not the cure-all that investors are hoping for.
Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!
by
Glenn Curtis
Glenn Curtis started his career as an equity analyst at Cantone Research, a New Jersey-based regional brokerage firm. He has since worked as an equity analyst and a financial writer at a number of print/web publications and brokerage firms including Registered Representative Magazine, Advanced Trading Magazine, Worldlyinvestor.com, RealMoney.com, TheStreet.com and Prudential Securities. Curtis has also held Series 6,7,24 and 63 securities licenses.
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