Bernanke Effect

The Fed cut its short-term interest-rate target 0.75 percentage point to 2.25%, not the full point that markets had been expecting. It was the largest disappointment the Fed has delivered to markets since the central bank began cutting rates in September. the move was also a signal that because of the Fed's concerns about inflation, it expects its other initiatives to bear more of the burden of stimulating growth...

Recognizing that, the Fed signaled in its end-of-meeting statement that the prospect of more rate cuts remains on the table. "The outlook...has weakened further," it said. "Consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth." It said "downside risks to growth remain," and the Fed will "act in a timely manner as needed."

Nonetheless, the Fed has increasingly come to the view that lower rates alone won't restore order to the financial markets and prevent a severe recession. It has rolled out ever more creative and aggressive attempts to infuse cash into market corners where it normally doesn't operate, culminating in Sunday's decision to lend to investment banks from its "discount window," a privilege previously reserved for commercial banks. Chairman Ben Bernanke also has publicly backed action to use public money to stem a tide of mortgage defaults and foreclosures.

Highlighting the depth of the Fed's inflation concerns, two of the 10 voting members of the policy-setting Federal Open Market Committee voted against the 3/4-point cut. Charles Plosser and Richard Fisher, presidents of the Federal Reserve Banks of Philadelphia and Dallas, "preferred less aggressive action at this meeting," the Fed said.

from the WSJ