Mark Gongloff: Fed cuts rates again

CNNfn producer Mark Gongloff discusses the latest rate cut by the Federal Reserve and what it means for consumers and the U.S. economy.

Q: How does this rate cut affect consumers?

GONGLOFF: It doesn't have a great deal of immediate impact for consumers. It affects a couple of variable-rate debt instruments -- some credit cards have variable rates that change as this rate changes; several banks cut their prime lending rate. If people want to refinance their home or take out a home equity loan, then those rates are tied to these cuts, and they can possibly get a good cheap rate that way.

Otherwise, it won't have much of an immediate impact. And, of course, the Fed has already made several other cuts this year, so interest rates are already pretty low. So at this point, it may have some impact, but maybe not anything you will see right away, aside from refinancing or getting a home equity loan.

Q: This is the sixth rate cut this year: How many more and when will this end?

GONGLOFF: It seems like it will end pretty soon. One thing we watch is the federal funds futures rate, and the implied yield on that seems to be guessing that the short-term interest rate is going to be at 3.5 percent by September 1. Right now, it's at 3.75 percent, which means the bond market is betting almost 100 percent that is going to cut another one-quarter percentage point by September 1.

The Fed next meets on August 21. A lot of analysts are saying there may be an intermediate cut before then, or another quarter point cut on August 21. That would almost certainly be it for the cuts. And if the economy shows signs of real strength, the Fed might just leave things alone.

What they've done basically is given themselves some leeway to cut again or not cut again, as economic numbers dictate.

The short answer is: They are very near the end in cuts, because too much more you're going to start worrying about inflation.

Q: Why didn't the Fed do bigger cuts back in January, rather than these six incremental cuts?

GONGLOFF: This Fed has always been cautious about its cuts. It raised 75 basis points back in November 1994, and that's the most drastic raise or cut it's made over the past decade.

The 50 basis point cuts it's made ... is the most drastic cutting since the last recession in 1991. I think if they did anything more drastic, they would be afraid of indicating panic about the state of the economy. They have to walk a fine line of 'the sky is falling' and 'we need to generate a little more economic activity.'

They can flood the market with too much money, and run a risk of inflation. So again, they're trying to walk a fine line of not scaring everyone and not generating inflation, while generating economic activity. They'll do the cuts incrementally, and then watch what happens.

Q: What is the state of the U.S. economy: Is it in recession?

GONGLOFF: Apparently we are not in a recession, but it's difficult to tell. Some people think we are; some people think we are not.

I think most people believe the manufacturing sector is in a recession. And if it continues to be slow and people continue to lose their jobs, then they stop spending. And then, we could be in real trouble, because the slowdown could spread into other areas of the economy.

Consumer spending makes up two-thirds of the economy. If they stop spending, then the economy could be in trouble.

And that's what the Fed can affect. The Fed doesn't have much affect on people still recovering from the technology stock bubble bursting last year; it doesn't have a whole lot of affect on corporations ramping up production. ...

So in the meantime, the Fed is just trying to keep consumer spending while we wait for the manufacturing sector to catch up. Some data show signs of strength in the economy. So at this point, the economy is not in recession, but that danger is still there -- and that's why we got this cut today.