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Fed Rate Cut: Did The Move Create Fear?

Tuesday, 18 Sep 2007 | 4:37 PM ET

The Fed's double-barreled rate cut was a surprise, even to traders who wanted a deep cut. But it is already igniting the back-of-mind fear that the Fed had to be very aggressive to head off some unknown economic problems. The Federal Reserve cut the target Fed funds rate by a half point to 4.75%. Most traders had expected a 0.25% cut. The Fed also took 0.50% off the discount rate, taking it to 5.25%.

The stock market though was in a celebratory mode, soaring as bond yields tighten, commodities rose and the dollar slumped. The Dow finished 335 points higher, taking it just 261 points form its all time high.

As stocks rallied, CNBC's Dylan Ratigan said on "Closing Bell," that for the Dow, it's the best day going back to 2003. But one thing you have to wonder is what does the Fed see in the future that they are cutting this aggressively."

As the markets dissect every word in the statement, it's worth noting the Fed reintroduced the fact that it sees inflation as a concern. The back drop to that is a powerful rally in commodities markets, driving oil today to a new high and sweeping along gold in a multi-year move. Of course, the inflation fighting Fed is one that, in some trader minds, would possibly be less aggressive about slicing rates in the future.

Former Fed Gov. Susan Bies was a guest on "Street Signs," (see video below) shortly after the rate decision. Bies gave her first interview since leaving the Fed in March and she clearly voiced that back-of-mind fear: "The Fed funds rate did surprise me to go 50 (basis points). I would guess, based on the statement, what they're concerned about is the forecast.. we know a large part of the mortgage difficulty is going to get worse in a year or two," she said.

She noted that many outstanding mortgages will reset with higher borrowing rates. "The impact on the housing sector is only going to intensify and my guess is by going all at once now they're trying to jump ahead of what they're likely to see on the housing impact."

Did the Fed Get it Right?
Discussing whether Bernanke got it right, with former Fed governors Susan Bies, former Fed governor; Robert McTeer, former Federal Reserve Bank of Dallas pres.; and CNBC's Erin Burnett

Questions? Comments? marketinsider@cnbc.com

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