Why Did the Fed Cut Rates Today?

In a surprise move Wednesday, the Federal Open Market Committee cut its key federal funds target rate by 50 basis points, to 6%.

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Why Did the Fed Cut Rates Today?

The news sent the Dow up more than 300 points while the Nasdaq added 250, or 12%, as investors hoped that lower interest rates would get the economy back on its feet again.

Talk of recession has grown in the past month, particularly following data Tuesday that indicated a sharp slowdown in manufacturing in December. The market had begun speculating about an intermeeting rate cut in the past week. But very few were expecting such a cut until Friday's jobs report.

So what does this surprise move really mean? Merrill Lynch economist Mary Dennis said it means the Fed is worried about a hard landing and that interest rates need to be slashed another 75 basis points before the economy is out of the water.

Why did the Fed cut interest rates before the jobs report comes out on Friday?

Dennis: Because the data are very weak.

How much lag before the effects of this 50-basis point cut show up in the economy?

Dennis: The Fed needs to get to neutral funds rate -- around 5.25% -- before there are any real material overall economic effects.

Do you expect more intermeeting cuts?

Dennis: Nothing is ruled out in terms of intermediate action.

Could this signal to the market that the Fed is panicking?

Dennis: I think it's extremely important that the Fed gets to a neutral funds rate as soon as possible in order to avoid a hard landing. And right now we're at 6. I think the Fed realizes they have to get to neutral even if it's going to be done in a few quick swoops.

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