How the FOMC operates on Interest Rates

The market has already priced in a 50 bp (basis point: 100 bp = 1%) rate cut, so anything less or if the FOMC is heavy handed with its language about future STIR cuts the market will tank and tank big time.

If the FOMC goes for a 75 or 100 bp cut, the market could rally to and even beyond the 930 level given the amount of PB (pull back) already in the market from the first of October.

Here is the razor's edge the FOMC is on:

Here isn't much room to cut STIR much lower given the current value of the 2 major STIR that the FOMC uses for economic control (called monetary policy).

The Fed Funds Rate (currently at 1.5%) is the rate at which banks in the US lend to each other usually overnight.

The Discount Rate (currently at 1.75%) is the rate which commercial banks (and now almost anyone else given the TARP legislation) borrow from the FRS (federal reserve system).

A cut of 50bp would bring the FFR to 1.0% (back under Greenspan where all the trouble started), and the DR to 1.25%. Both of these rates will then be historically very low and severely limits the FOMC's future actions since you can't go < 0. Also, once the rates go to or near 0% money starts being denominated in USD driving the USD down against other currencies, but then the money leaves the US for overseas projects due to the very low interests rates on capital that these low rates bring. It's a double edged sword.

Bottom line, the US risks the same problem that Japan did when it had its real estate bubble pop in the late 1980's and early 1990's and the lowering of STIR to 0% in Japan and holding it there for over 12 years. Japan fairly much disappeared off the face of the planet as a financial powerhouse.

The cards are lining up on the US house of cards.