Fear of losing money has dominated investors' emotions in the new year, which has translated into wrecked stock markets worldwide.
Odd as it may sound, what the Federal Reserve needs to do is restore the flip-side emotion: fear of not making enough money.
To put it another way, it would help the Fed, and the economy, if you took more risk with your nest egg. Ditto for the institutional investors who control the really big bucks.
The Fed's dramatic three-quarter-point cut in short-term interest rates this week could be followed by another cut of at least half a point Wednesday, when the central bank wraps up its regularly scheduled January meeting.
Say goodbye to those low- or no-risk, mid-single-digit returns on bank savings certificates and money market mutual funds. We're heading for yields that will make many conservative savers weep.
The annualized yield on the average money market mutual fund dropped to 3.78% this week from just under 4% the previous week, according to the Money Fund Report newsletter.
If the Fed takes its benchmark rate to 3% next week, as expected, money fund average yields will be in the mid-2% range within six weeks, says Connie Bugbee, who edits the newsletter.
Countrywide Bank, the deposit-taking arm of struggling mortgage giant Countrywide Financial Corp., was paying 5.45% on a six-month savings certificate at the start of the year. Now it's offering 4%.
The official reason for Fed interest rate cuts, of course, is to ease the financial burden on borrowers and banks and make it easier for credit to flow, with the hope of bolstering economic activity -- or at least keeping the economy from spiraling into a deep downturn.
But a sharp drop in short-term interest rates has another effect. It ravages returns on low- or no-risk cash accounts and thereby forces investors to question just how safe they can afford to play it with their money.
You've probably got long-term goals for your nest egg, and chances are you won't reach those goals earning 2% a year.
Nor, for that matter, would major pension funds and other institutional investors be able to meet their obligations earning low-single-digit returns, which is all that most Treasury securities pay now.
If that drives people out of cash and into the stock market, lifting share prices, it can bolster the economy by providing a psychological boost for investors in general and businesses in particular. After all, chief executives naturally are going to feel more confident about hiring and spending if the market is up than if it's plummeting.
