Again, I was watching CNBC (why do I keep doing that?). There was a brief discussion about whether or not a Fed Funds Rate cut actually matters. The guest claimed that it did, because every little bit will help.

Bloomberg carries the torch with an article titled Fed May Cut Rate to 1%, Signal Steps to Save Economy:

The Federal Reserve may lower its benchmark interest rate to 1 percent today and signal further reductions to levels unseen since Dwight Eisenhower was president.

Tumbling commodities prices and weaker consumer spending are slowing inflation, which officials described as a “significant concern” at their last scheduled meeting in September. Tomorrow, the Commerce Department will probably report that the economy shrank at a 0.5 percent annual rate in the third quarter, the most since the 2001 recession, economists predict.

The Fed “will be very aggressive,” said Mark Gertler, a New York University economist and research co-author with Fed Chairman Ben S. Bernanke. “Inflation risks are off the table” and “the issue now is how bad the recession will be.”

So where’s the bullshit? It’s the quote that the Fed “will be very aggressive.” Cutting the target rate to 1% is not aggressive. While it would be true that a cut from 1.5% to 1% could be aggressive, that’s not what is happening in this strange place called “reality.” See, the target rate is what the Fed tries to maintain. In normal times, the actual rate tracks the target rate fairly well. In fact, the Fed intervenes in the market if it doesn’t. That’s the theory, anyway. Right now, the actual rate is 0.8%. The actual rate is not tracking the 1.5% target rate. So, a cut to 1% of the target rate will not reduce the actual rate. The Fed has lost control over the rate. Anything at this point is just posturing.

This isn’t to say that the Fed couldn’t have control over the rate. They could intervene to raise the actual rate up to the target rate. But, previous actions by the Fed indicate that such future actions are not likely. The no-limit currency swaps with foreign central banks is perhaps the best example. The bullshit, then, is not that the Fed isn’t trying to increase liquidity, the bullshit is that this cut in the target rate will have any meaning.

At Minyanville, Kevin Depew calls bullshit in his own special way in Five Things You Need to Know: Fed Faces the Limits of Confidence:

Whatever the Fed does tomorrow, 50 basis points, 75 basis points, will simply be an attempt to bring the target rate down to reflect some semblance of reality.

Then, next week, when the financial television channels and media discover that interest rates in the real economy have not moved, or perhaps have even moved in a direction opposite of the Fed Funds target rate, there will be a preponderance of bearish sentiment about how the Fed rate cuts “are not working.”

He has the graphs of the target and actual rate that are worth looking at.