Fed Cuts Rate By Half A Point to 1%: A Band-Aid On Our National Cancer

The Federal Reserve lowered the Federal Funds rate by half a percentage point today in the hopes that it’ll ward off the deep recession that keeps peeking it’s ugly head up at us. That’s about what everyone expected they’d do, but stocks still fell sharply right after the news, probably since many investors wanted an even more aggressive cut. Stock did eventually rebound and are still on their way up as this is being written.

The Fed’s statement on the cut said that, “The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures.” Many people may not realize it, but we’re at the point now where it’s actually possible that the Federal Reserve could reduce the overnight lending rate to zero. Japan reached that point in the 1990s and remained there for years while it struggled to revive its economy. That’s grim.

What could the Fed do after that? Isn’t that the ultimate limit? Well, not entirely, even if the federal funds rate were slashed to zero, the Fed could still “stimulate” (read: “screw up”) the economy. For instance, they could start buying longer-term Treasury securities in an attempt to push down rates on overnight loans between banks, which would probably have the intended effect for a limited time. But the main point is, it’s like fighting mother nature. The market will do what it wants, so you can’t artificially lower rates or change some other fundamental of the market and not expect it to snap back at some point. It’s like trying to hold back the ocean.

We’re facing an unprecedented financial crisis, and the Fed doesn’t really know what to do. They’re just following the textbook and doing what they’ve always done. But as Common Sense Investors like Peter Schiff and Jim Rogers have been saying for years, we can’t keep fooling ourselves; this inflation will catch up to us.

No matter what the Fed does, they can’t force banks to lend money, and they can’t force consumer spending. Consumer spending, which accounts for about two-thirds of the nation’s economic activity, has declined will continue to decline. And that’s not really such a bad thing. We’re going to have to just take our medicine, sit back for a while and stop spending so much. We need to get back to being a nation of producers instead of a nation of 100% consumers. That’s all. It’s not really so horrible.