Excellent point Ray, no one ever gets to borrow money at the Fed Funds rate! It does have some effect however, since prime rates are set off of it and most bank loans are written with some add on to prime, such as prime + 100 basis points. When bonds are traded, it is indeed the market's setting. Bank loans do play an important role in the economy so we can't write off the Fed's work as totally meaningless, but it is indeed not a 100% correlation by any means.


An interesting concept has emerged the last few months that I find quite strange. Seems that people are looking for the Fed to determine things for them, instead of the markets determining pricing and future expectations and having the Fed react to them. The upshot right now is that a lowering of the rates by the Fed might actually have an opposite result. For some reason the markets seem to be looking for any positive signs about the economy from the Fed. If the Fed lowers the rates, people will see that as a negative sign from the Fed and hammer the economy down. I don't see a lowering of rates doing any real good right now and think it would be unwarranted. Banks don't lack the money to lend, they just are afraid to do it. I don't think giving them an extra 25 or 50 BP as a spread is going to get them to overcome their fears. I don't think businesses are sitting idle on projects that would suddenly become viable with a small cut in the interest rate. Right now everyone agrees the problem is capital spending and business investment. Those are usually very sensitve to lending rates, but I think they are past that point right now because the hurdle rates are so low. In other words if you are a business owner and you look at projects, you are talking about a maybe 5% loan rate, after tax. There are probably tons of projects you could do that you would think could cover your cost of capital. However you are too uncertain about business trends to take the plunge. If suddenly the rate was 4.5%, that would mean absolutely nothing, in fact the lower rate probably would be offset because of the negative effects of people fretting even more about the economy. That is where the problem lies and why lowering rates will do nothing to kick start the segment of the economy that everyone is looking for a recovery from.


The Fed really just needs to sit still and take its time right now. I get a sense that they are exactly of the same mindset as me. They see that all is not doom and gloom and that a slow but steady recovery that gains strength in small steps is what the country needs, not a quick bounce back that creates unrealistic future expectations and possibly gets another bubble mentality going.