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Current DateTime: 12:43:10 09 Nov 2009
LinksList Documentid: 24355697

Current DateTime: 12:43:10 09 Nov 2009
LinksList Documentid: 24890560
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Fed's Big Dilemma: What If Rate Cuts Don't Work?
By: Jeff Cox, , Special to CNBC.com | 08 Feb 2008 | 01:53 PM ET
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A Diagnosis, But No Cure

Haag Sherman, chief investment officer of Salient Partners in Houston, Texas, wants the Fed to get out of the "appeasing mode" that leads to the rate cuts and let market forces take hold. He believes that the unwinding of the subprime losses will be the only thing that cures the ills that have befallen stocks and the economy.

"We're going through a period of correction, and I think ultimately the rate cuts will be counterproductive because the correction is going to happen regardless," Sherman said. "This is just a natural market-driven response to an asset and credit bubble."

Tammy Gray / AP

Still, the Fed soldiers on.

There's consensus that the Fed Open Market Committee will approve a rate cut of at least a quarter-point at its March 18 meeting. And the familiar cycle probably will start anew -- rate cut, market bounce, market fall -- leading some to wonder how far the Fed will go until finally shutting off the rate-cut spigot.

"What happens when they lower it further and further and the market doesn't react to the stimulus?" Sherman wondered. "At some point a crack addict has to get off crack."

Those who doubt the effectiveness of the rate cuts assert that the market reaction has been overblown to the credit crunch.

"I think there's an irrational fear in the marketplace right now. I do not believe the banking system is in any kind of serious trouble," said Isaac, chairman of the Federal Deposit Insurance Corp in the 1980s and early 1990s during the savings and loan collapse. "Take it from someone who has seen a banking crisis up close and personal."

And not everyone believes the rate cuts are irrelevant.

Among those who think the Fed's rate cuts do matter are those who maintain the central bank should not be obliged to the stock market, and thus the effectiveness of the rate cuts should not be judged solely on the impact they have on stocks.

"The real goal of the Fed is to try to keep the economy from sinking into recession if they can do so without letting inflation get out of hand," said Daniel Siever, finance professor at San Diego State University. "The stock market is fixated on the Fed, but the Fed is not fixated on the stock market. Stock market commentators are the first to bash the Fed if the market goes down, and I think the Fed's feeling is we're not here to serve you."

© 2009 CNBC.com


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