US lowers interest rates but does it matter?

Following the Fed's reduction of US interest rates to 1% yesterday, Time magazine analyses whether lowering rates will have any effect - even a reduction to zero, like what happened in Japan in 1999.

"The U.S. Federal Reserve cut its benchmark interest rate by 50 basis points to 1% on Wednesday, continuing an aggressive effort to fend off a deep recession. The rate now stands at the lowest level since 2004 — and central bankers signaled they may resort to more cuts in the months ahead. The hope is that further rate cuts will stabilize volatile financial markets and accelerate the slowing economy. But as the rate heads toward zero, the Fed is rapidly running out of room for reductions. Not only that, economists and analysts are questioning whether rate cuts produce any bang for the buck under the current extraordinary circumstances.

In a normal cyclical slowdown, lowering interest rates encourages fresh business activity by reducing the cost of borrowing from banks. With more borrowing comes more investment, more jobs and more growth. But these are far from ordinary times. Banks, already burdened with bad consumer and commercial debts, are desperate to clean up their balance sheets and avoid risk — they are not eager to take on more risk by issuing new loans against the backdrop of a deteriorating business climate. American consumers, too, are trying to reduce household debt, so borrowing more money for a new car or to remodel the kitchen is not a high priority. And without greater consumer spending, most companies have little need for new loans to expand operations".

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