Fed Cuts, But Only by 75 bps

Rather than giving investors the 100-basis point cut many had hoped for, the Fed voted to lower its target for the fed funds rate by 75 basis points. The discount rate, however, was also cut by 75 basis points. With Sunday's 25-basis point cut, this resulted in a three-day 100 basis-point cut in the overnight rate.

The vote was not unanimous, as Dallas Fed President Richard Fisher and Philadelphia Fed President Charles Plosser wanted a less-aggressive cut. The committee continued to express worries about inflationary pressure, but also gave a more negative assessment of the economy.

Although the immediate reaction by the markets was not positive, the Fed is correct to focus on the discount window more so than the fed funds rate. The U.S. is facing a credit problem -- not an economic problem -- and it does not matter how low interest rates are if lenders do not trust borrowers.

Despite today's actions, the ongoing problems will not go away over night. Firms like National City (NCC) and MBIA (MBI - Analyst Report) have put themselves in the situations that cannot simply be resolved by lower rates. Similarly, Ryland Group's (RYL - Snapshot Report) prospects will not improve simply because of today's action.

The credit problem will take time to resolve itself, but it will be resolved. In the meantime, investors should continue to research stocks and use the current uncertainty to purchase stocks whose prices have been unfairly discounted by the current market environment.

Read the full analyst report on NCC.

Read the full analyst report on MBI.

Read the full analyst report on RYL.

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