Tuesday, May 6, 2008

Euphoria over Interest Rates

Do you invest in the stock market and are you sometimes perplexed about the stock market reaction to the Fed's action be it in raising or reducing the interest rate?

Given the transparent nature of the Fed these days, they all but tell the market what they intend to do in their meetings. So the meetings almost appear to be a formal declaration of intent rather than a debate on the best course of action.

However, in my simple mind, I can't understand the euphoria a 1/4 point interest rate cut or the dejection a similar increase commands. There is a several 100 point dip in the market if the rates raise and a similar gain should the rates reduce.

I can understand that the fed sets the benchmark rate and that the banks lend money to their consumers after tacking some points to this rate. But I can't really figure out how a 1/4 or a 1/2 point increase or decrease materially affects the lending or the borrowing of money for anyone but for the most borderline customer whose credit or repayment ability is so compromised that this becomes a big deal.

Truly, have you set your mind on a car or a remodel? Would you stop this project based on a small interest adjustment in any direction? I wouldn't and I can't understand why the stock market could care!

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