Fed Cuts To Range Of 0% To 0.25%

The Fed cut the fed funds rate by a range of 75 to 100 basis points. The new range is 0 to 25 basis points, as opposed to an absolute target. The discount rate was cut by 75 basis points to 0.5% and a 0.25% rate was established on required and excess reserve balances of 1/4 percent.

Though the size of today’s cut was bigger than many forecast (expectations for a 50 basis-point cut had risen dramatically over the past 7 days), the initial reaction in the stock market has been positive, with the major indexes setting new intraday highs.

More importantly, the Fed outlined additional measures to provide much needed liquidity. Specifically, the Fed will buy agency debt and mortgage-back securities. It may also buy long-term Treasury bonds if that is required to reduce long-term lending rates. Finally, the Fed left the door wide open for additional measures.

Bluntly put, the Fed has acknowledged that cutting the fed funds rate has not worked, and other measures are needed. Understand that the primary goal of the Fed right now is to get lenders lending - not reducing rates.

Until lenders start trusting borrowers, it will be difficult for the economy to recover. Therefore, while the Fed might be lauded for staying creative, conditions for broad range of companies — including those outside of the financial sector such as Freeport-McMoRan (FCX), Nordstrom (JWN) and National Oilwell Varco (NOV) - to regain positive business business momentum.

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