March 20, 2001

Fed Decision: Does it Matter?

A rate cut from the Fed will make about as much difference as the last one in January -- no difference at all! Here's why: The Fed can cut rates until the cows come home, but if consumers and companies continue to withdraw investments to pay down their debts, the markets will continue to fall. The savings rate turned negative last year and has continued on its downward path. Americans no longer have nest eggs or rainy day funds at their disposal. Instead, they relied on the winning ways of the stock market for the past decade. Well, now that the stock market has proven to be an unreliable savings vehicle -- losing $4.9 trillion in value since last March's peak -- consumers and companies have to unload equities in order to pay their bills.

And it's only going to get worse. In 1990, all household debt (including mortgages) equaled 85% of personal disposable income. Last year, that figure hit 105% of disposable income. With the economy slowing drastically and every week bringing another raft of huge corporate layoffs, Americans are facing a cash crunch of historic proportions.

That's why bankruptcy filings are on the rise, as are credit card, auto, and home loan delinquencies. The stock market slide over the past year is just making the cash crunch even worse!

As investors remove funds from the stock market, prices will continue to fall, and as portfolios shrink, more investors will feel pressured to take money out of the stock market! It's a vicious cycle, and one that won't be helped by a mere rate cut in interest rates.

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