Friday November 8, 6:57 PM
SCHRODERS: FED RATE CUT NOT THE RIGHT MEDICINE FOR THE MARKET
By Vasu Menon, Chief Editorial finatiQ
Views from Schroders:
The FOMC voted unanimously to cut the fed funds target by 50 basis points to 1.25% and to also cut the discount rate by 50 basis points to 0.75%.
While easing by more than the 25 basis points was generally expected, the FOMC at the same time jettisoned its "easing bias" and reverted to a balanced risk statement. This suggests that barring some type of calamity, more easing is unlikely in the near term.
While lower short term interest rates are probably a marginal positive for the economy, it is important for investors to understand that the economy's problems are largely balance sheet related. Reducing the fed funds target from an already low 1.75% to an even lower 1.25% will have little or no impact on the process of balance sheet clean up by corporations and households, nor on the fact that capital spending growth will not occur until there is a need for it (i.e. until excess capacity is digested).
Therefore, while it is certainly understandable that political and market pressures have convinced the FOMC to move, it would be a big mistake to expect that lower short term interest rates will change the economic or financial landscape to any significant degree. Lower short term interest rates are not the medicine for ills such as the balance sheet excesses and the copious spare capacity in many industries that were created during the bubble. Time is the only real cure for these problems as corrective measures are taken at the corporate and the household levels.
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