Thinking About Interest Rates and the Economy

Today’s very modest reported decline in overall employment, 4,000 jobs, appears to stem from the loss of about 6,000 mortgage industry positions. Most of the financial press–I’m watching Bloomberg TV right now and the Dow has dropped 198 points–seems to think that the job loss will stimulate another federal reserve rate cut. Here’s my question: given that a lot of people were getting credit at rates lower than probably would have been wise how much of a rate cut will it take to produce the desired stimulus? Should we even make one at all?

The Fed, of course, cannot directly set the federal funds rate in any case; it just sets a target and engages in open market activity to reach it. To a large extent, particularly in the last few years, the Fed has also done a lot of “jawboning” to try and get banks to set the prime lending rate wherever it thinks it should be. So, with so many mortgage lenders out of business–particularly new, aggressive players that were lending in to marginal–will a Fed funds rate really inject much money into the economy at all? Would continued (reasonably) tight monetary policy make sense in any case?

Would a discount rate cut really do anything? (Do discount rate cuts EVER really do anything other than send a “we’re serious” signal in any case?)