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Flying Away On A Wing And A Prayer: 125 Basis Points In 8 Days

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Well, the 47.5% minority of those polled at DealBreaker got it right. The Fed announced a cut of 50 basis points in the target rate and the discount rate, meaning we've seen 125 basis points slashed off the Fed Funds target rate in the last week or so. As far as we can remember, this has never happened.
There will be some who wonder whether or not the Fed is misreading economic and market conditions. It notes that credit has tightened despite the easing of the commercial paper market, the refinancing jump in mortgages and a lower LIBOR. Still, it's the cut that market wanted. Stocks jumped, bonds and the dollar declined. What was that we were saying about converting the dollar into a gift card with a short expiration date?
One thing that's clear is that the Fed has become a lot less predictable, at least on any long-term basis. Two weeks ago, the chances of a 50 bps cut barely registered in the futures. And since then they've jumped all over the place. So it seems that the market isn't sure what the Fed is going to do week to week. Or perhaps it's the Fed that isn't sure.
The full statement after the jump.


The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 3 percent.
Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets.
The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.
Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Donald L. Kohn; Randall S. Kroszner; Frederic S. Mishkin; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh. Voting against was Richard W. Fisher, who preferred no change in the target for the federal funds rate at this meeting.
In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 3-1/2 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Bosto