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.

Economics, Finance Economics, Fed, interest rates, rate cut

This is going to be an interesting week in economic review. The Fed meets again on Wednesday, and the stock market seems to have another rate cut factored in.

I can’t believe Ben Bernanke would drop the overnight rate this soon after dropping the rate a larger than anticipated half point.

The credit problems are starting to moderate, third quarter financials are stronger than expected, the World economy is booming on the weak dollar, and the dismal housing market has yet to spill over into the rest of the economy. In short, things don’t look all that bad from my point of view. Or, more properly stated, things don’t look like they’re going down hill fast enough to justify another rate cut.

Here is why I’m interested in this next move. A while back I started increasing my cash position, creating an online savings account paying 5.05% at Emigrant Direct. I did this in anticipation that the markets were going to start to wane, and I wanted to make sure I wasn’t leveraged too much in the stock market.

Then Bernanke lowered the interest rate, and as such my Emigrant Direct return dropped to 4.75%. The upside of this is that the stock market still looked healthy, and my stocks were (and still are) producing good returns.

Now, the Fed is rumored to be poised to lower the rate again, which will further drop my online savings return.

However, I’ve never known the Fed’s timing (back through the Greenspan era) to mesh real well with the economy. They’ve always waited too long (like Greenspan taking a huge chunk out of the overnight rate all at once) or jumped the gun when it comes to adjusting the rate, as I think they are now.

I don’t think we’ve had enough time to see the effects of the previous half-point rate cut filter through the market. In my opinion, it takes a minimum of three months for the cut to effect the broader economy.

It will be interesting to see what happens on Wednesday, and I think this next decision will start to reveal what type of economist we have at the helm.

This is all just another reason to find stocks that are not heavily dependent on the health of our economy.

Economics, Finance Ben Bernanke, credit problem, Fed, FOMC, rate cut