Market Awaits More Fed Rate Cuts

"Not moving aggressively would be a very risky strategy for the Fed," says Lehman's Harris. "If the financial system collapsed, the dollar would be performing even worse than it is now."

Subodh Kumar, chief investment strategist with Subodh Kumar & Associates, says the Fed wants to get its key rate target down to 2% by June.

"They have to get down to 2% as quickly as possible, so I would not rule out that they do that [Tuesday]," says Kumar.

The central bank has taken a number of drastic measures to extend credit to the banking system in unorthodox ways as the liquidity crisis has intensified in recent weeks. Most recently, it announced it will slash the discount rate and let securities dealers borrow funds from the Fed on similar terms as banks, marking the broadest expansion of the Fed's powers since the Great Depression. The move was the clearest sign yet that the Fed is scrambling to prevent a systemic breakdown in a financial system loaded with illiquid, derivative securities.

"One investment bank failure poses little by way of macroeconomic threat, but a systemic breakdown is a different issue altogether," said Ian Shepherdson, chief U.S. economist with High Frequency Economics, in a note to clients. "It is important to remember here that the financial system is in much worse shape than the macroeconomy."

The offer was effective as of Monday and will last for at least six months. The Fed lowered the rate charged at its discount window by a quarter of a percentage point, to 3.25%, and extended the maximum term to 90 days from 30.

The Fed has slashed 225 basis points from its fed funds rate since the credit crisis began last fall -- with 125 basis points of the move coming in January alone.

Stocks in general held up better on Monday than many expected -- considering the carnage. The Dow Jones Industrial Average rallied to a gain of 0.2%, while the S&P 500 shed 0.9% and the Nasdaq Composite was down 1.6%.

Financials, however, continued to get slaughtered. Citigroup(C Quote) dropped 5.9% to trade at just $18.62. Merrill Lynch (MER Quote) was down 5.4% and Lehman Brothers was off 19.1%.

President Bush applauded the Fed's actions, saying that his administration was "on top of the situation."

"One thing is for certain, we're in challenging times," said Bush after meeting with his senior economic advisers. "But another thing is for certain: We've taken strong, decisive action."

Merrill Lynch economist David Rosenberg said that like its previous efforts, the Fed's actions this week will be unsuccessful in stemming problems in the financial markets.

"As with all the other liquidity measures, [the Fed's latest move] does not deal with or remove the underlying credit issues that plague the financial markets," said Rosenberg.

Know What You Own: JPMorgan operates in the financial services industry, and some of the other stocks in its field include Citigroup (C Quote), Goldman Sachs (GS Quote), Morgan Stanley (MS Quote) and Bank of America (BAC Quote). For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.