Beige Book, Kohn Point to Cut

The Federal Reserve delivered a double dose of rate-cut medicine to the markets Wednesday.

Hope for rate cuts to come spurred a strong stock market rally -- and the financial sector -- after a dovish morning speech by Fed Vice Chairman Donald Kohn, and the Fed's beige book, released in the afternoon, depicted a buckling economy in need of support.

The beige book, which surveys economic conditions between meetings of the rate-setting Federal Open Market Committee, noted that in October through mid-November, seven of the Fed's 12 districts reported slower growth.

The report, combined with Kohn's comments that included concerns that recent credit market "turbulence" could "increase the possibility of further tightening in financial conditions for households and businesses," left the markets reassured the Fed will step in with deeper rate cuts that may help stave off a recession. Rate-cut hopes also helped offset news of more bank writedowns, as Wells Fargo(WFC Quote), often considered conservative, revealed a $1.4 billion fourth-quarter hit on late Tuesday.

This beige book reported some new weaknesses in the U.S. economy. In particular, retail spending was "soft" in many districts, read the report, and most retailers "were expecting a slow holiday season." The housing situation remained dim, "keeping downward pressure on prices and construction activity."

That's not such a surprise, but the Fed noted that commercial real estate activity, which many economists have held up as an example of resilience in the economy, "showed signs of leveling off" in some areas. Banks exhibited lower levels of commercial and industrial loans.