Fed Rate Cut Fails to Deliver Much Impact on Stocks

The stock market collected on its rate-cut IOU today from the Fed, but the central bank's move did little to boost the spirits of Wall Street.

Traders at the NY Stock Exchange
Traders at the NY Stock Exchange

The Federal Reserve delivered on its anticipated half-point cut in the Fed funds rate amid belief that anything less would have been a disappointment.

But the cut itself was met with a collective yawn that put indexes swinging around level ground, a modest selloff from after the announcement. Some, though, were hoping the move might help continue Wall Street's dramatic 11 percent rally Tuesday.

"Now that you've had that rally ... I think that most of the steam has been taken out of a post-Fed bounce," says Mike Burnick, director of research for Weiss Capital Management in Palm Beach Gardens, Fla. He adds that the market has been in a mode of "buy on the rumor, sell on the news" that was apt to lead to the selloff after the rate announcement.

As part of an aggressive strategy to push banks into more lending, the central bank has slashed its main lending rate to 1.5 percent, so it doesn't have much room left before it runs out of rate-cut ammunition.

Still, the market saw the rate move as necessary to help investor psychology. In fact, there was sentiment over the past few days that the Fed might have been even more aggressive and cut the rate 75 basis points, or three-quarters of a point, or even run it all the way to zero.

Moreover, the impact of the Fed rate cut is reduced by the real impact that it will have beyond market psychology.

The Fed rate is already at a negative level in real terms--compared to inflation--so other than its sway over the prime rate of lending that affects credit card holders, there's little real economic benefit until banks ease their lending policies.

It's a reality not lost on Wall Street.

"If people can't go and take advantage of those rates, then what good is it to have them?" says Dennis P. Barba Jr., managing partner at of The Oxford Group of Raymond James in Cleveland. "If the Fed's going to lower rates without business having access to borrow capital at a reduced prime rate, it's not going to do anything to spur economic activity and keep recession at a minimum."

Consumers also are getting pinched by the lack of credit and the slowdown in the economy, another factor mitigating the effects of the Fed rate cut on stocks.

"Individual consumers are pretty much choking on debt as it is," Burnick says. "They're going to be reluctant to spend. In that kind of environment, the cost of money isn't really a factor."

So while some buyers step cautiously back into the market, few are pinning the hopes of a market recovery on the Fed's monetary policy.

"This stuff's always priced in," says Matthew Tuttle, president of Tuttle Wealth Management in Stamford, Conn. "If they cut 1 percent or three-quarters of a percent or don't cut at all, we may see that moving markets. If it's just what everyone expects, no big deal."