I like thinking through financial cause/effect problems for the sake of my own mental clarity, so I’ll take a crack at this. Fair warning though that I have no particular expertise, inside info or clairvoyant powers. (Invest at your own risk. Past performance is no guarantee of futrure results.)
Fed interest rate changes in themselves do very little. There may be some variable-rate loans out there with adjustable interest rates tied to the FRB rates, but there are not many. (For such loans, a rate decline could immediately (depending on loan terms) result in lower interest costs.) The effect only becomes noticeable if the money center banks change their prime and other rates in reaction to the Fed action, which they usually do (they are not required to do so and, on the flip side, people with savings accounts often notice and complain that banks are very quick to lower rates offered on deposits but are slower to raise them when the Fed increases rates).
So, now we have some trend-setting banks that are offering slightly lower rates to borrowers. Many outstanding loans do have adjustable rates based on the lenders’ prime rates, so some borrowers will soon see an automatic decrease in rates, giving those businesses more spendable income. Additionally, some businesses may now decide to borrow funds they wouldn’t have otherwise because the rates are low. The banks see the effect as slightly higher loan volume with slightly lower overall returns.
The big effect will only come when we know what the businesses will use the loan proceeds for. Will they pay down other debt? Will they repurchase shares? Will they pay increased salaries? Will they buy a corporate retreat center in Belize? All of these activities may indirectly stimulate the economy because they put cash into the hands of people who may spend the money on goods and services they would not have purchased otherwise. As I understand it, however, the real punch for the economy comes if the businesses use the loan proceeds/interest savings to purchase machinery and equipment which is more efficient than existing machines and equipment. This permits the production of goods from less labor and resources–a net benefit in the macroeconomic sense because that conserved labor/resources can now be used to produce an additional product for the benefit of someone. (Of course more efficient machinery may not yet exist, so the proceeds may need to be spent on R&D to see whether or not more efficient ways of designing machines can be found.)
So, the question really is, would businesses be willing to buy new equipment/R&D if they could borrow the money to do so at slightly lower rates? IMHO, right now the answer is no. There are other factors a manager looks at in deciding whether to buy equipment, and right now these negative factors may “look” more important to our manager than lower rates. For instance, if the business is not meeting budget because sales are down, or if inventories are high, or if there are transportation problems or customer service issues, or if the top execs are distracted by lawsuits or employee unrest, our manager may decide that company resources are best directed at these issues, many of which cannot be solved by better machinery (at least in the short run–in the long run, the more efficient competitor overall wins, but that is the long run and our manager does not now know what path will ultimately prove most efficient).
Managers are consumers too, and their confidence level feeds into their willingness to purchase machinery. (Or, they may think that technology is changing so quickly that they can save the expense of an interim software upgrade by purchasing the big release scheduled for the next year–customers do not turn on a dime because they have invested in their existing relationship with our manager’s business too.) A decrease in rates is only one indirect factor out of many when a manager makes a puchasing decision.
Really low (some articles claim they’re negative with inflation included) rates in Japan have not spurred growth there. (This may be because the banks can’t lend at any rate because they have no assets available to lend.) In any event, Japan’s example shows that factors besides interest rate levels influence economic growth/contraction.
The current fixation on interest rates seems to have coincided with the rise of the cult of the Fed/Alan Greenspan of the last few years. Given the fairly unregulated nature of the US economy, interest rate adjustments are one of the few tools available to central planners in the US, so maybe focusing on rates indicates a desire for the simplicity of a centrally-planned economy–it’s much easier for the financial press to explain an interest rate move than to figure out why (really why) the economy does what it does.