Will keep trying to ease credit crunch, stimulate economy
By Greg Robb, MarketWatch
WASHINGTON (MarketWatch) - The Federal Reserve is expected to cut interest rates this afternoon, making good on Chairman Ben Bernanke's pledge to do whatever it takes to get the economy back in gear.
"We will not stand down until we have achieved our goals of repairing and reforming our financial system and restoring prosperity," Bernanke told the Economic Club of New York earlier this month.
James Glassman, economist at JP Morgan Chase, said the market took Bernanke at his word.
As a result, failure to follow though would lead to worsening financial market conditions.
"It would be an odd time for the Fed to get cautious," Glassman said.
Economists believe that the rate cut will not quickly cure the ailing economy. "Everyone wants a quick fix, but it takes time," "said Mike Wallace, an economist with Action Economics.
The Fed, which has already taken a series of dramatic steps to ease the effects of the credit crunch that is sweeping world markets, is expected to lower its key overnight lending rate to 1% from 1.5%, bringing the federal funds rate to its lowest since 2004.
But bringing rates lower right now might not help very much, analysts said, because the effective federal funds rate has already fallen to 1% because of a new Fed policy to pay banks interest on the excess reserves they deposit at the Fed.
"The fed funds rate is almost irrelevant," Wallace said. "The easing has already taken place."
But Glassman said that there are some benefits to cutting rates and the Fed must keep trying.
"As long as there are benefits they've got to keep trying," he said.
The lower fed funds rate has helped marginally to unclog credit markets and restore some confidence in markets, but credit remains tight despite the Fed's moves.
The Fed has thrown out its traditional policy playbook in its effort to restore stability to financial markets and cushion the economy.
The aggressive stance is needed because financial market conditions remain hostile to growth and the outlook for the economy grows darker by the day.
The rate cut to 1% would bring the Fed funds rate down to its lowest level since 2004.
Financial markets have already priced in a half-point cut and Fed watchers say the central bank would not like to disappoint investors.
But some see no utility in the move.
"Why is everybody clamoring for rate cuts? What good are rate cuts going to do?" said Robert Brusca, chief economist at FAO Economics.
The problem is that consumers have seen little benefit from lower rates. Banks just are not passing along the lower rates to consumers in the form of lower interest rates on loans or credit cards.
"Banks are like roach motels. The rate cuts go in but they don't come out," Brusca said.
