Fed Rate Cut May Not Have a Major Impact on Stocks

Sunday, Nov 2, 2008  |  Updated 11:38 AM EDT
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Fed Rate Cut May Not Have a Major Impact on Stocks

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Wall Street waiting for news from the Fed.

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Wall Street is waiting to collect on a rate-cut IOU today from the Fed, but the central bank's move is unlikely to cause a major shift in the markets.

 

The market is expecting a half-point cut in the Fed funds rate, and anything less will be seen as a big disappointment.

"From a sentiment standpoint it's anticipated, and if we don't get a rate cut I think we're going to have problems," says David Twibell, president of wealth management for Colorado Capital Bank in Denver. "It will give the impression that the Fed, despite all their actions, may not be willing to take the extra step most people expect them to take and want them to take."

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 sees the rate move as necessary to help investor psychology. In fact, there's been a growing sentiment over the past few days that the Fed might get 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.

Yet even that might not cause a move higher in stocks after Wall Street's dramatic 11 percent rally Tuesday. Analysts saw the rally as driven at least partly by hopes of a rate cut, and the sentiment boost may well have already run its course even before the Fed's Open Market Committee announces its decision.

"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 could actually lead to a selloff once the Fed releases its decision at about 2:15 pm ET.

 

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

Former Dallas Fed President Bob McTeer talks rate cut in video at left.

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 a 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."

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