Pisani's Trader Talk: Fed Cut Shifts Rumor Mill Into Overdrive

CNBC's Bob Pisani reports on what traders are telling him:

An extraordinary number of rumors have taken flight this afternoon--mostly about further potential actions the Fed may take late today or over the weekend.

One rumor in the air is that the Fed will open the repo market for non-agency paper (i.e., securities issued by non-federally related institutions), which may serve to pry open the almost closed mortgage market as banks hoarding cash loan against other collateral.

Traders--particularly those short--are very nervous about that chatter. They fear the Fed will do something more short of cutting the Fed Funds rate. That is why, despite attempts to sell into the rally, we're seeing a modest midday lift.

Remember, too, that this is an options expiration day. Index options settled at the open today, and traders short the options had to cover, which added fuel to the rally. Individual stock options settle at the close today, and if traders still short those options smell a rally, they will aggressively cover, adding fuel to the fire.

Several points about the Fed statement: (posted before markets open Friday)

1) they have acknowledged that "financial market conditions have deteriorated..." and growth could be constrained. This is a strong signal.

2) they have changed the terms: institutions can borrow money for 30 days now, rather than overnight, at the discount rate, and cheaper than before. The Fed is essentially saying, go out, lend, don't worry about it.

3) will this really make a difference? The hope is it will. There has been money around, but no one has been willing to lend it because no one is sure they will get it back. That's been the problem for Countrywide and many other mortgage companies. The theory here is that with more liquidity in the market, and the acknowledgement from the Fed that conditions have deteriorated, it will make lenders more willing to lend.

This is not necessarily all good news for stock traders. Volatility will certainly end up hurting some traders today. Many will also say that their comments about growth slowing isn’t good for stocks

Regardless, Bernanke is still a relatively unknown quantity, but with this move he has signaled that he is watching.