Waiting For The Fed

The Federal Open Market Committee announced it would cut the federal-funds rate, charged on overnight loans between banks, by a quarter-point to 4.25%. The move met most expectations, although some had hoped for a half-point cut.

The Fed has cut short-term interest rates by a full point since its first move lower this year on Sept. 18. The Fed's accompanying statement mentioned apparently slowing economic growth, as a result of mounting damage from the correction in housing markets, as well as slowing in business and consumer spending. Those who had hoped for a half-point cut to the discount rate were also disappointed. The Fed cut the discount rate, charged on direct loans to commercial banks, by a quarter-point to 4.75%, which left the spread between the two rates unchanged.

To some, the Fed statement seems out of touch with reality and missed an opportunity to bolster confidence in the credit markets.

The accompanying guidance was difficult to interpret. It did not address the balance of risks between growth and inflation and appears to be a compromise with the inflation hawks. Although it did mention slowing growth, but it also said that "some inflation risks remain" because of energy and commodity prices. The language about inflation risks was identical to language in the last FOMC statement.

Is the Fed for real? It doesn't seem to know that the market is very weak and expectations are what is driving the market.

Markets reacted badly. The Dow Jones Industrial Average fell 294.26, or 2.1%, to 13432.77.