It’s really no surprise that the Fed dropped rates by another quarter point yesterday. In fact, The Street figured it was a 90% sure thing that it would happen.

So now I can expect my Emigrant Direct savings account rate to drop accordingly, just as companies like Proctor and Gamble are issuing statements that they’re worried about consumer spending in the next few months (and when they indicate publicly they’re worried about it, don’t count on financials being all that great next quarter).

With the second rate cut totaling 0.75% in six weeks, it’s clear the Fed is trying to give the economy a shot in the arm to by lowering borrowing costs.

The FOMC minutes indicate that the Fed committee is well aware that the economy is slowing, but in not so many words, they think “they’re on top of it”. Yeah right. If the Fed were truly on top of the economy, would we be in the credit crunch we’re currently in? How about the housing market? Seems the Fed wasn’t quite “on top” of those sub-prime scams that helped inflate housing.

So how all powerful is the Fed… really?

I’m starting to believe that the Fed doesn’t have the reigns quite as tight as they’d like to think they do. To be honest, the rate cut really doesn’t help me out financially, at least directly. It will lower the return on safe investments, and force a guy into more risk, through either the stock market or other risky avenues. Indirectly it may help lower prices of goods and services, but not immediately.

I’m a believer in financial cycles. Economically, we’ll have peaks and valleys that the Fed can only exacerbate. Interest rate changes only increase the amplitude of the wave, and while good intentioned, intervention and artificial manipulation only reinforces the true power of supply and demand.

Tags: Economics | Fed | interest rates | rate cut

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