Interest-rate Cut: Too Little, Too Late?

Every little bit helps, and a coordinated interest-rate reduction sends a strong signal. I think the capital markets now are of the opinion that policy makers acted too late to stem the credit squeeze around the world. Investors seem to be of the mind that, no matter what central banks or governments do, they can’t stop the economic contraction that’s taking place.

The half-point interest-rate cut certainly gives the Federal Reserve more room to reduce rates if required in the future. This is why they didn’t make a bold statement like Australia did by lowering its benchmark rate a full percentage.

We are at the end of the beginning of the credit hangover and tight money is likely to be with us for at least all of next year. This is going to make life a lot more difficult for small and large businesses alike. An economy can experience a recession with easy access to capital. Just imagine an economic slowdown when money is tight.

Of course, the stock market isn’t usually very happy in the month of October and I’ll be glad when it’s done. There is selling going on in the stock market, but equally as important is the lack of buyers. Even institutional investors are sitting on the sidelines right now waiting for the turmoil to calm. This lack of demand for shares is really accentuating the situation and is adding to the shock to the system.

With reduced interest rates comes a lower dollar and, in this particular case, there’s a good argument to be made that this is beneficial to the American economy. Manufacturing and other exporting industries need the help of a lower dollar to help increase demand for American products abroad.

So, we’ll just have to wait and see what, if any, effect reduced interest rates will have on the current state of things. Most certainly, the drama will continue.