For The Record...

Since the Fed is meeting today, I want to put my thoughts down on paper, so to speak, about the outcome. The Fed will cut the Fed Funds rate 25bps to 5% and, more importantly, cut the discount rate at least 50 bps. The move lower in the former represents the Fed's acknowledgement that economic conditions are softer and the process toward moving to a more stimulative stance needs to begin now in order to have a payoff six to twelve months down the road. While futures are suggesting 50bp move, that is only going to occur in times of real crisis, not an awakening to the reality of credit risk. (Someone yesterday suggested a cut of 3/8 of a point, an interesting prospect). If the Fed thought things were in crisis mode, they would have made an intermediate cut to express their concern. Which brings us to the latter point, the discount rate. Here, the Fed does think there is at least a mini-crisis going on, as evidenced by the Aug. 17 move 50bps lower in the discount rate. The money markets, while better than four to six weeks ago, are not truly functioning normally. Hence, a further cut in the discount rate is warranted to bring that market back to an acceptable level of liquidity. There is a risk, at some point down the road, that the money markets become too dependent on the discount window, but that possibility is remote. Away from money markets, other credit markets are returning to normal function, albeit at much wider, more realistic levels. We'll all see at 2:15 this afternoon.