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December 16, 2008

Zero point? One-quarter point? One-half point?

So Big Ben went even lower than expected and dropped the funds rate to zero to one-quarter percent, in a range. Is it really that much more significant than the expected half-point cut? And, of much more benefit? And, does it have potential drawbacks.

First, by having a range, Big Ben is trying to avoid putting himself in the Japanese zero percent box. Too late.
“In some senses the whole point of this meeting was to say 'Quit watching interest rates, watch the other things that we can and will do,'” said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland.

Second, per that quote above, you really have shot your wad, even with a bit of rate range. There is nowhere else to go with interest rates. Money supply? If credit stays locked up, that will not make a big difference either. Is there any there there after this?
”What we heard today was not revolutionarily different but it was a reminder that they are committed to using their balance sheet to the fullest extent to repair the financial markets and stimulate the economy,” said Jim McDonald, director of equity research at Northern Trust in Chicago, who said the credit markets need to show signs that fear is dissipating.

”The credit markets now need to show some improvement.”

And, if they do not?

Third, so the Street liked the surprise. What happens after it digests it?

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