Bigger Rate Cut from Fed Looks More Likely

The frenzied selling in stocks worldwide has market strategists talking more seriously about a 75-basis point rate cut from the Federal Reserve when it meets next week.

While market participants have been clamoring for several days for this big of a cut, economists and strategists are seeing this as a more likely possibility now because of the sudden and broad weakness in major markets around the world.

Tony Crescenzi, chief bond market strategist at Miller Tabak, said he can see why the Fed might be even more aggressive next week since the global pain signals potential systemic weakness. "The odds of 75 go up because there's systemic issues here, given the broad weakness in equities around the world," Crescenzi said. "The extra move can be justified by the systemic risk."

The March fed funds futures contract, the best proxy for what the market thinks will happen to monetary policy, was lately factoring in an 86% chance the Fed eases rates by 75 basis points when it meets Tuesday. Yesterday, the futures were pricing in a 77% chance of such a move.

In January, the Fed dropped rates by a full percentage point, from 6.5% to 5.5%, in two separate moves designed to kick-start the economy.

Generally, the Fed doesn't like to seem as if stock market activity is determining its policy. But in an environment like this, where the Fed is already being aggressive about cutting rates to stave off recession, it might take an additional step since it is expected to cut rates sharply anyway. Such a move would give consumers a bit of a jolt in terms of restoring their badly bruised confidence. Any Fed moves, however, won't immediately have an impact on the greater economy since rate cuts are generally considered to take six to nine months to work their way through the economy.