Credit Market Stays in Focus

After a welcome weekend respite from the market's turbulence, investors will quickly learn in the coming week whether Friday's Fed-induced rally was just short-term relief or something more sustainable.

Much of that may depend on whether the Fed's move Friday to slice the rate charged at its discount lending window was enough to loosen the noose around normal lending operations around the world. The credit markets remain the lynchpin for any sustained stock market recovery.

"We are certainly not out of the woods yet," says Mike Malone, trading analyst at Cowen & Co. "The markets will remain volatile ... until the large dislocations in the currency and credit and equity markets are worked through. That will take some time."

But, if the Fed's step shores up enough confidence to quell fears of financial system collapse, perhaps the central bank will have helped the markets sidestep some of the economic damage that can be done when lending and credit seize up for long periods of time. And it will have done so without diminishing its inflation-fighting capabilities by cutting the fed funds rate.

The discount window applies to the short-term rate at which the Fed lends to banks and other depository institutions. The more heralded fed funds rate is used when banks lend to each other. The risks to inflation that have kept the Fed holding that rate steady for a year are still in place.