The Interest Rate Cuts Didn’t Cut It . . . Yet

Chart of the Week for March 23-30, 2001

Earlier this week, the Federal Reserve made yet another 50 basis points cut in the Fed Fund rates — the rate that banks charge one another for overnight loans. These moves are aimed at reinvigorating the economy by making it cheaper for both business and consumers to borrow and spend.

Certainly these rate cuts have been a primary driver of the strong bond market performance. Additionally, the demand for fixed income securities has increased dramatically as investors seek a safe haven from the turbulent equity markets. While demand has increased, supply has not, resulting in higher prices.

Conventional wisdom indicates that as rates decline, businesses will invest in new areas, consumers will increase spending, corporate sales (and earnings) will increase and, ultimately stock prices will rise. However, despite three rate cuts in three months totaling 1.50%, the equity markets continue to flounder and consumer confidence remains shaky.

We end with the familiar refrain: a diversified portfolio is recommended for all investors, particularly those near or already enjoying retirement.

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