The Fed cut just a quarter point from both its Fed funds target rate and the discount rate. The Fed also changed its view on the economy to be more definitive about a slowdown. "Incoming information suggests that economic growth is slowing, reflecting the intensification of the housing correction and some softening in the business and consumer spending. Moreover, strains in the financial markets have increased in recent weeks."
However, the Fed may have more tricks up its collective sleeves, says CNBC's senior economic correspondent Steve Liesman. Liesman reported on "Fast Money" that a Fed source told him the Fed is still actively considering a set of tools to address the liquidity issue. The source would not say what the the tools are but that they would consider using them sooner rather than later.
Liesman said in his report it could be the market is misreading the Fed.
Andy Busch, global fx strategist at BMO Capital Markets, described the markets reaction this way in an afternoon note: "With the Fed acting like the parent of a spoiled child, they cut the Federal Funds rate and the Discount rate a miserly 25 basis points that sent the equities into an infantile screaming fit, the US dollar holding its breath and turning red, and the US bond market smiling like a tyke that got the last cookie."
Scotsman Capital managing director Vince Farrell called it: "A bad decision by the Fed to lower the discount rate only 25 basis points." Farrell, a CNBC contributor said in a note that "equally bad was the tentative statement. The risks in my view, are clearly on the downside. I don't know what world the Fed is looking at."
The Dow lost 2.1% Tuesday, while the Nasdaq was down 2.4% and the S&P 500 was off 2.5%. The sell off was the largest since early November. The dollar fell 0.9% against the yen and rose 0.4% against the Euro. Buying in Treasurys pushed the yield on the 10-year to 3.979% and the two-year to 2.960%.
"I think the (stock) market got away ahead of itself to begin with," said John O'Donoghue, co-head of equities at Cowen. "We're down 5-1/2 percent from the highs. Don't forget we had a 10 percent correction."
"From a technical standpoint, maybe they'll just stabilize down here and maybe go side ways. Today there wasn't a lot of volume on the tape so that's not confirmation either way," said O'Donoghue. On Wednesday, "We might get a jiggle to the downside and then stabilize," he said.
Busch says he expects the markets will quickly move on and realize things aren't that bad. "I think they'll be getting decent data for the rest of the week with earnings from Lehman on Thursday the next big equity event," he said in his note. Producer and consumer prices are due Thursday and Friday, respectively and retail sales for November are reported Thursday.
International trade and import and export prices are reported at 8:30 a.m. Wednesday. Oil inventory data is reported at 10:30 a.m.
"Watch US trade tomorrow as it could surprise with a deficit of below $55 billion due to less toys coming in from China. SED statements and China will dominate," Busch wrote.
Treasury Secretary Henry Paulson is in China this week with other U.S. officials. Paulson leads the delegation in the meeting of the U.S.-China Strategic Economic Dialogue (SED). Opening statements take place Wednesday morning Beijing time.
Other events Wednesday include the Goldman Sachs financial services conference in New York.