Myron Kandel: Fed cuts 'a shot in the arm' for economy

Myron Kandel

CNN Financial Editor Myron Kandel followed the Federal Reserve's decision Tuesday to cut interest rates by half a point, lowering the benchmark federal funds rate to 4 percent and hinting at future cuts.

Q: How long will it take for this interest rate cut to be felt in the economy?

KANDEL: Don't forget today's interest rate cut is the fifth in four and a half months. That's really an unprecedented amount of cutting in such a short time, and it does take a while before the economy really feels the benefits of an interest rate cut. The original cuts should take effect in the next couple of months, and this one will add to that.

Q: What will this rate cut do for the economy and for consumers?

KANDEL: My own opinion is that these five cuts will give the economy a shot in the arm and help it recover. It helps consumers because it lowers the interest rates they'll be paying on things like home equity montages, credit card debt and other consumer loans that are based directly on the federal funds rate -- which then get translated into cuts in the prime rate by the nation's big banks. So the consumer will benefit from that, and of course business will benefit because the costs of borrowing will be reduced.

Q: With five cuts so far this year, does the Fed strategy increase the risk of inflation later in the year?

KANDEL: That's the danger, of course. But the Fed actually referred to that today and said they're not really worried about inflation. Inflation, though it has been creeping up a bit, it has not been serious. The Fed obviously took a look at inflation and said, "We're not worried at this point."

Q: Will the rate cut have any long-term effect on U.S. stocks?

KANDEL: Generally, the stock market does to well when the Fed embarks on a series of rate cuts. Merrill Lynch did a study and found that out of the last 10 times the Fed began to ease, the Dow Jones Industrial Average was up an average of 20 percent within a year. I would expect that to happen again this time around.

Q: What will the Fed do next?

KANDEL: The Fed's next policy-making committee meeting is the last week in June, and the most of the experts on Wall Street are looking for another rate cut then. The general feeling is might be a quarter-point, then quarter-point sometime over the summer.

The general feeling on Wall Street is another cut coming by the end of June. I should add that depends on the economy performs between now and then. If the economy suddenly strengthens in a big way, they might not cut. But the way things are looking now, it seems another cut is in the offing.