How the Fed's continuing cuts affect stocks

In the latest installment of Clarkonomics, Clark discussed the impact that the Federal Reserve's continuing interest rate cuts have had on the stock market. The Fed is the nation's banker and is responsible for managing the size and direction of the economy, plus keeping inflation in check. There's a delicate balance that must be struck between not letting inflation get out of control and not letting the economy tank. Juggling those two duties is extremely difficult, and you'll find there are a lot of gripers when it comes to the Fed.

If the Fed cuts interest rates and there's investor fear about the economy being in sad shape, then the stock market will likely go down as result. It's a fear factor playing itself out in the market. On the other hand, why do stocks sometimes go up after cuts? That happens when interest rates on "safe" savings options like money-market accounts and CDs drop. So long as stock investors are not worried that recession is going to eat up earnings at companies, stocks will look more favorable than the so-called safe options. Therefore, people are more likely to take a chance on stocks when interest rates on the safe stuff are too low.

Right now the Fed is trying to stave off recession or reduce the impact, but it's also trying to prop up the giant monster mega-banks. There's the "Too Big To Fail" concept, an unwritten law that states the collapse of multiple monster mega-banks would be disastrous for our economy. So the Fed's cut in interest rates helps the monster mega-bank lower their cost of borrowing money to survive to fight another day. That's a hidden agenda that the Fed will never disclose -- after all, the free market dictates you're not supposed to bail out companies that make bad choices. If you were to buy stock in a giant monster mega-bank, there's a chance that you'd make money rather than lose because of the "Too Big To Fail" idea. That's not really how capitalism is supposed to work, but that's the reality.