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Fed cuts both fed fund and discount rate 25 basis points, not the 50 basis point – market expectations

Posted by Adrian on December 12, 2007

The Federal reserve cut the Fed Fund rate down 25 basis points from 4.50% to 4.25%, I expected a 50 basis point cut, on both the Fed Fund and the Discount rate. Despite the 25 basis cut from both bank rates, the Dow still plunged 294.26 points. Some may argue that this was due to the fact that the markets were expecting a bigger cut (50 basis points) especially from the discount rate (the fed lending rate to other banks, now 4.75% from 5.00%). Is this really the reason the market plunged? Or is the market in trouble regardless of rate cuts, even larger ones? I feel that the stock market is now locked into downward spiraling fear factor. The jitters and plunging stocks is due now entirely to the credit crisis, which in my in opinion is going to create a more severe credit freeze to the world markets. It could be suggested that any cuts now may do nothing, as rallies on the Dow Jones may become less and less, with larger drops expected into next year. Especially watching the first two quarters of 2008.

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