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A recent article from Reuters states that “the U.S. Federal Reserve is expected to slash interest rates by as much as a whole percentage point at its policy meeting on Tuesday.” Currently this rate is at 3% and the cut would lower it down to 2%. This is yet another bold move by the federal reserve in an attempt to prevent a recession in the U.S. economy. Since September, “the Fed has cut overnight rates by 2.25 percentage points.”

If Bernanke goes ahead with this 1% cut that is rumored, he is not giving himself a whole lot of wiggle room for later. Once the rate is down to zero, he can’t exactly go into the negative numbers. If I were him I would have taken a more gradual step-down approach instead of these large cuts. Personally I believe that large cuts and hikes tend to scare the markets. People like to be able to predict the future. Remember when Greenspan had his usual .25% hike every meeting? The markets loved that. They knew exactly what was going to happen each time there was a meeting. There were not a whole lot of surprises. It seems like now every time there is a Fed meeting there is a large speculation over what is going to happen. I don’t think that this is a good thing for the health of the market.

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Consumers can feel the effects of Bernanke’s cuts though. I had a money market account with VirtualBank that was paying 4.65% no more than 6 months ago. Now it is paying only 3%. CD rates at the credit union that I work at have dropped steadily as well. If I remember, a CD was about 5.05% only about five months ago. Now I believe it is paying 3.65%. Every day I hear grumblings from the CD savers who rely on CD rates as a main source of their income. Many complain that if rates continue to drop they will not have the interest income that they need to sustain their lifestyle.

If this cut were to be 1% as predicted, it would be the “biggest rate cut since 1982.” If anyone remembers correctly, 1982 was a time of rampant inflation and economic uncertainty. Hopefully we will not end up in the same boat. According to the article, “the Fed is expected to announce its decision around 2:15 p.m. EDT.” This will be right in the middle of the trading day. I predict that the cut will go through as predicted. I also predict that the markets will be down tomorrow, as people are starting to lose faith that rate cuts are a viable solution to our current economic dilemma.