Did The Fed Waste Its Ammo?

The Fed's surprise 3/4-point rate cut gave investors a jolt of confidence and will probably help the consumer better navigate a weak economy -- if the Fed continues an aggressive program to trim rates.

Traders pretty much agree that without the surprise move, the stock market would have continued its nosedive and would have ended incredibly ugly today. Widely rumored by the markets, the bold, oversized, inter-meeting cut to a 3.75 percent fed funds target rate was the answer to some traders' prayers.

But still, the back-of-the-mind question is: Did the Fed overreact and give markets too much of a good thing?

Tony Crescenzi, Fed watcher and chief bond market strategist at Miller Tabak, has some concerns.

In a note titled, "The Bernanke Pacifier: One Downside of the Cut," he points out that the Fed has now lost control of the timing of its policy actions and there will be a dislocation when it finally wrests back control.

Crescenzi says the Fed missed one of several opportunities to cut rates, when December's weak jobs data was released Jan. 4. He says that now, to regain control, the Fed must disappoint the markets at some point -- and we know that could get messy.

"It would have been better, for example, for the Fed to have chosen a 50 basis point cut today and another 25 basis points (or at most another 50 basis points) to help differentiate the reasons behind the cuts," he wrote.

He said the Fed should have differentiated between risks from tightened financial conditions, and the recent slide in the strength of the economy.

Traders widely expect the Fed to slash another half point when it holds its regularly scheduled meeting next Tuesday and Wednesday.

But Crescenzi said there are some real positives behind today's moves. He points out that certain debt payments tied to the prime rate are immediate beneficiaries, including some $500 billion in home equity loans and some 40 percent of the near $1.5 trillion in commercial and industrial loans outstanding.

Santelli's Take

In an aside, Rick Santelli tells a personal story of how the reduced rates are already having a positive affect. Several weeks ago, he inquired about refinancing his 15-year mortgage. Today, no less than three different brokers called him offering a new lowered rate of 5-1/8 percent.

"At this point in the credit correction, the Fed had very little choice," said Santelli. "Whether it's monetary policy or it's fiscal policy, they had to contribute something that was a quick solution. They needed to respond and they did."

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Click to see Santelli vs. Jim Cramer on the Fed

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As for the market, "I don't know if this makes the bottom or not, but there's a lot of positives," he said. Santelli said the yield curve's steepening is good for banks and the obvious clear benefit for the mortgage market is another.

The financial sector got an immediate bounce as shorts rushed in to cover positions and buyers emerged, hunting out bargains. The S&P financial sector was up 2.25 percent. Even Bank of America, which reported disappointing profit, gained 4 percent.

"These guys (the Fed) can't win. If they do something, people complain and if they don't do anything, people complain," Santelli said.

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