How Does the Discount Rate Being Cut Effect Investors?

by | Aug 18, 2007 | Asset Management, Point and Figure

On Friday, the Federal Reserve cut the discount rate by a 1/2 pt.

They cut the discount rate — NOT the Fed Funds rate.

Understand, the discount rate is the rate banks and brokers are charged to borrow from the Fed.

This doesn’t change rates you and I are charged.

The Fed believes the “pressure” in the market may be limited to the financial system…meaning banks, brokers and lenders. And seeing a few hedge funds melt and several mortgage companies implode as quickly as Enron scared some bankers and brokers.

Look, the discount rate is a really small portion of the financial system. Like the tight end position on your fantasy football team. Less than $100 million is borrowed on many days…pretty small.

It’s a speck.

So understand — this was mostly a symbolic move this morning.

And, as usual, the stock market took it too far…up 300 points in the opening minutes of trading.

So, expect a short term rally. It could fizzle by 2 pm, or maybe in three weeks. For this to stick, the Federal Reserve should say they’re changing policy, and also cut the Fed Funds rate at the next meeting (September 18).

Instead, they said this will be only a short term accommodation.

We’re not missing anything.

The indicators are saying exercise extreme caution, as I’ve been saying for weeks and weeks now. A symbolic rate cut is nice, but it’s only a small first step.
All the sectors (yes, ALL sectors) are now in O’s, signaling everything is down and no sign (yet) of turning around. It’s going to take a lot to get this baby off the launch pad. Even the short-term indicators — at historically washed out levels — show no signs of turning anytime soon.
So, expect a bounce, not the start of a new up-trend.

If you have ANY questions regarding your investments, pick up the phone and call 732-223-9000.


Thomas Mullooly
Mullooly Asset Management LLC
Our Only Business Is Fee-Only Investment Advice