Some Wall Street reaction after the Federal Reserve announced an unscheduled cut in the federal funds target rate from 4.25 percent to 3.5 percent:
Ian Shepherdson, chief U.S. economist at High Frequency Economics, calls the timing of the Fed's move a response to Wall Street fright: "[T]here can be little doubt the Fed would have waited until the [scheduled] meeting next week if it had not been for the state of the markets," he says. Looking ahead, Shepherdson says, "The economic data will continue to worsen; this move is not an instant fix. The economy is still staring recession in the face, but at least the Fed now gets it."
Goldman Sachs says the Fed will cut another half a point at its upcoming January meeting. Its economists continue to expect the Federal Open Market Committee will lower rates to 2.5 percent but said that "the risks remain tilted to the downside."
Meanwhile in the credit markets, Richard Bernstein at Merrill Lynch warns that central banks might not be equipped to save the day:
"Many investors still believe that the credit crisis is purely a 'U.S. subprime problem.' Nothing could be farther from the truth, in our opinion," he writes. "There appears to be a growing global credit pandemic." Bernstein notes that huge liquidity injections by the Fed and other central banks around the world can help ease credit conditions, but he adds that what matters is confidence. "Central banks only control the price of credit, and not the availability of credit. Watching central banks' base interest rates is, of course, important. Watching credit availability is more important," he says. Given the Fed's obvious worry over tight lending, the credit crunch may be set to continue for some time.
Peter Boockvar, Miller Tabak's equity strategist, asks what this latest rate cut says about how the central bank sees its role and whether easing rates will cause more harm down the line:
"By not waiting a week [until the FOMC's scheduled January 29-30 meeting], it's apparent that they responded to the overseas sell-offs and tried to bail out stock markets. The question is, 'Do rate cuts cure what ails us?' If we're suffering from a hangover after a period of easy money and the very easy Greenspan Fed, why do we think easy money again is going to cure that? You don't drink a lot to cure a hangover," he says.
Keith Hembre, chief economist at First American Funds, says the Fed is making the right call now, though the outlook remains gloomy:
"I suppose you can be thankful the worst was averted here in the near term. The fact that they're now appearing to get serious about easing policy in the face of potential economic problems and continued market turmoil is good. But our view has been that this is likely to be a recessionary environment."