Traders Scoff at Cut

Updated from 2:18 p.m. EST

The Federal Reserve disappointed the markets Tuesday by offering up a meek policy decision that seems both behind the curve and mired in inconsistency.

The central bank cut the federal funds rate a quarter-point to 4.25% and the discount rate 25 basis points to 4.75%. It is the third consecutive meeting that the central bank's Federal Open Markets Committee has slashed rates, amid unforgiving credit markets that make it difficult for firms to borrow money.

"Mr. Bernanke blew it," says James Bianco, president of Bianco Research. "The Fed should have cut the discount rate to the fed funds rate or lower."

The Dow Jones Industrial Average, which was flat ahead of the decision, plummeted almost 300 points after the Fed's decision, with the 10-year Treasury yield falling below 4% as investors fled risky securities to the safe haven of government bonds.

Bianco and many traders expected the Fed would cut the discount rate more than 25 basis points to help loosen the pressure on financial institutions, which have been reluctant to lend to one another. That's driven up market-based rates for overnight lending, such as the London Interbank Offered Rate. The Fed's discount rate is the interest rate that banks are charged to borrow money from their regional Federal Reserve Bank's lending facility.

Boston Fed President Eric Rosengren dissented with the rest of the committee, preferring to cut the fed funds rate by 50 basis points. This is the second meeting in a row that has had a dissenter in the mix. At the Oct. 31 meeting, Kansas City Fed President Thomas Hoenig dissented, preferring no rate cut. The committee cut 25 basis points at that time.