I can't say much about the first two. But let's think about the Fed for a minute. When I wrote in the afternoon, it looked like the market was only pricing in a small probability of a rate cut. Late night coverage on CNBC suggests that the probability has increased substantially now.
The Wall Street Journal acknowledges the uncertainty:
Federal Reserve officials aren't inclined to veer from plans to hold short-term interest rates steady at Tuesday's meeting, even though financial markets are putting strong odds on a quick rate cut.
The Fed's thinking could change, particularly if there is another sharp deterioration in markets and the financial sector Tuesday. And even if officials decide to stay on hold, they could signal in their end-of-meeting statement a greater willingness to consider rate cuts if the economy or markets worsen.
A rate cut would be a confidence booster, to be sure. Ordinarily, one might expect a rate cut in this case would prevent the financial market problems from spreading to Main Street. I'm not sure that 25 basis points (or even 50) would really have much of an effect in that regard. Plus, if the Fed were to cut 50 b.p. tomorrow (as some are expecting), it leave only another 1.50% to go before hitting the zero lower bound. Given that this could go on for a while, it is imperative that they hold back some ammunition just in case things get much worse.
But most importantly, I don't see how 25 points (or even 50) does anything substantial to ease the credit crisis that the expansion of the quantity of credit through the various lending facilities can't do.
In the end, they may decide that a 25 or 50 point move is necessary to inspire confidence. I would like to think that in the last year the market has wised up in that regard and can understand that this problem will not be solved by a rate cut any time a financial firm runs into trouble.
These are momentous times, the likes of which we will be talking about for years to come.
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