The Federal Reserve Bank's Open Market Committee (FOMC) today announced a quarter-point cut in the federal funds rate, the rate at which banks lend each other money overnight. This was the sixth reduction this year, all told slashing the fed funds number from 6.5% to 3.75%. Today's move was more modest than the others, which were all half-point drops. The Fed today also cut the discount rate a quarter-point to 3.25%. (This may be news to many, but our moles slipped us the news yesterday -- in our dreams.). The federal funds rate now stands at its lowest point in over seven years.
In its press release, the nation's central bank observed continued "declining profitability and business capital spending, weak expansion of consumption, and slowing growth abroad." It concluded in its usual guarded language that economic weakness is a greater risk than inflation.
This year's steep decline in rates contrasts with the Fed's rapid rate hikes in 1999-2000 when the economy was in overdrive. Many financial pundits argue whether and when the cuts might revive the economy, reasoning that lowering the federal funds rate allows banks to borrow money at lower rates and earn money lending that cash. This theoretically encourages lending to business. But many businesses are in trouble not because they can't get capital -- many are up to their eyeballs in debt already -- but because customers aren't buying their products. So while day traders may care about short-term interest rate moves, long-term investors should care more about individual businesses and how they perform in good and bad times, higher rates or lower.
In sum: Ratemania may help pass the time, but long-term investors know that rates go up, rates go down, and over 10, 20, or 30 years, it's just tidal action. For more information on the Alan Greenspan and his merry band, enjoy our special feature on The Federal Reserve.
Tom Jacobs (TMF Tom9) decries Fed madness, yet he devoured Woodward's biography of Greenspan in hours. To see his stock holdings, view his profile, and check out The Motley Fool's disclosure policy.
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