Money for nothing, and blue chips for free.(Inside Track)(interest rates)

The Federal Reserve on December 16 announced a record-setting cut in interest rates, targeting the federal funds rate at zero to a quarter of a percent. There were hosannas and flourishes on Wall Street, with the Dow surging more than three hundred points.

The Fed's latest action will likely have the same effect as its other recent moves, moves intended to soften the effects of an economic calamity the Fed itself has been largely responsible for creating. In point of fact, the federal funds rate--the average interest rate that Fed member banks charge one another to make short-term (usually overnight) loans of reserves kept at the Fed--is not "set" by the Fed at all.

Instead, the Fed encourages interest rates within the target range by the purchase or sale of government securities (so-called "open market operations"). If the Fed wishes to depress interest rates, it will buy more securities, thereby injecting more money into the banking system and encouraging lower interest rates. That, at least, is how the system works in theory.

But as the New York Fed's own website admits, "The results of the Fed's monetary policy actions cannot be predicted with precision. The Federal Reserve's influence over short-term interest rates can create conditions conducive to economic growth, but ever-changing market and ...