Would Fed Rate Cut Be Effective?

With the upset in the financial market, many people are looking to the Federal Reserve to provide a quick fix. I doubt that is likely, let alone possible.

How effective would Fed rate cut be?

WASHINGTON (MarketWatch) -- Many financial market participants are clamoring for the Federal Reserve to cut interest rates to provide liquidity to markets, but some veteran Fed watchers question how effective a rate cut would be.

Earlier Friday, the Federal Reserve announced it was providing liquidity "to facilitate the orderly functioning of financial markets."

For those not fluent in Fed-speak, that means they will not lower the rates right now, but they will expand the money supply through open market operations. Here's why:

The Fed has long avoided appearing to gear their monetary policy decisions to any particular happenings in the market at the time. To do that is to abdicate the control of monetary policy to the business decisions of others. They are not about to appear to be underwriting some bad loan decisions made by some investment companies. The Fed's main goal is to keep the currency stable and inflation low. So at this time, with inflation low, they will avoid lowering rates if they can.

But at the same time they cannot completely ignore the distress going on in the financial markets. So they will expand the money supply for a bit via open market operations and hope that the markets will settle down.