For Bernanke, Question Is How Much (More) Will The Fed Cut?

The betting is no longer on whether there's a half point rate cut coming, it's when, and how much more will follow. Fed Chairman Ben Bernanke was surprisingly blunt in much anticipated comments today. He made it clear the Fed will take action to stop economic decline and it will be aggressive.

"In light of recent changes in the outlook for and the risks to growth, additonal policy easing may be necessary," he said in a speech to a business group.

And even more bluntly, he said the central bankers "stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risk."

Whether he intended to shock with his directness or not is unclear but he triggered an immediate market reaction. In the Fed funds futures market, traders began to speculate that there would be as much as 1-1/2 points shaved from the Fed funds rate by March.

The Treasury yield curve rose sharply, resulting in the biggest gap between two-year Treasurys and 10-year notes in four years. The dollar, which had been higher against the euro earlier, slumped, and stocks had a short-lived triple digit runup on the comments.

Bernanke's speech today was expected to be light on news but was considered critical because it comes as the view of some of Wall Street's biggest firms turns to recession.

"The Federal Reserve is not currently forecasting a recession. We are forecasting slow growth, but as I mentioned today there are downside risks and therefore it's very important for us to stand ready," Bernanke said in response to a question at the event. He made it clear that is why the Fed is ready to take action.

Speculation that the Fed would move even before its end of January meeting also continues to swirl, but CNBC's Rick Santelli says he and a good number of traders he knows in the Chicago pits do not believe that will happen. But it has become more likely in the minds of traders that a half point cut will come at the next meeting. Also clear to some traders is the Fed is less worried about inflation.

"He's got the helicopter out and they're loading it up with paper right now," said Santelli.

Bernanke has been battling a public image problem. Just look at the headline in the New York Times: "Wall Street Questioning if Bernanke is Tough Enough." Today's element of surprise got the stock market's attention but couldn't hold it. Perhaps though, it might keep some of his critics at bay if the Fed follows through.

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