Bernanke Hints At Fed Rate Cut...Who Cares?

Today Ben Bernanke hinted at the possibility of a cut in interest rates.

So what?

What good will a cut in interest rates do? Does anyone think that the fed funds rate has any bearing at all at what rates are being thrown around in the real world right now?

With the government loaning out billions every minute to Wall Street, "injecting" banks with "liquidity" left and right, bailing out some firms, taking over others, "coordinating" hundreds of billions of dollars of loans to European banks, and now getting directly involved in the commercial paper market, what relevance does the Fed Funds rate have right now?

I'd say, about zero.

The articles commenting on Bernanke's pronouncement mention his thoughts that inflation is subsiding and growth is in jeopardy. These conditions sound ripe for a rate cut. But beyond that fact that the Fed Funds rate is temporarily irrelevant, I contest whether it will even have any psychological effect on the market. Right now NO ONE CARES ABOUT THE FED'S INTEREST RATES.

We are in a time like the late 90s when the Fed was worried about bank runs due to the Y2K scare. And like after 9/11, when financial markets were literally in shambles. Both times, the effective Fed Funds rate was dropped to 1% or below, even as it official stood much higher. Can anyone honestly say the Fed Funds rate is 2.0% right now? Does that have any meaning?

I'm struggling to think of a good analogy. It's like telling someone you're going to decrease the price of gasoline as he watches his car on fire, about to explode. Good news!

Or better yet: remember the floods in the midwest this summer? Where water was flowing over the tops of dams that could break at any second? Well the Fed is saying, we're going to open the floodgates a bit—that should alleviate the pressure on the dam!

In other words, the maximum amount of money is already flowing. Cutting interest rates will have absolutely no effect. So much money is available from the government already I don't know what they think this will accomplish.

The articles state that it may lower the value of the dollar. This crisis is creating chaos in the currency exchange rates that the fed funds rate will have little effect on. As I said, the fed funds rate is irrelevant right now. Treasuries were sold yielding 0.02% a few weeks ago. The commercial paper market froze for most of a day.

The fed funds rate matters when things are working properly. When meltdowns occur, it doesn't have a meaning. You can see from the market's reaction today: no one cared. Rate cuts don't help anymore. Until the financial system gets its feet under it, no one is going to respond to the magic of a rate cut.

The Fed would be better off to save the rate cut for a less rainy day, when people might believe that the announcement will instill confidence. Because I guarantee that the Fed is operating with a de facto rate well under whatever it's going to announce as the new value. Like OPEC announcing its quotas, right now the Fed has two sets of numbers: the official number, and the real number. The real number is already as low as it can possibly go.