It can take up to nine months for Federal Reserve actions to work themselves through the real economy. In the short term of the next several weeks, most of the impact of this morning's 75 point basis cut will be psychological, and the Federal Reserve knows this. If the rate cut is too large there is a risk of starting a panic over how bad the economy really is, while too conservative a move could make people think that inflation is about to take off.

Originally I thought the Fed would show some restraint so as not to worry people. However, the emergency meeting suggests either that the Fed sees the economy as worse than others see it or that they are trying to shock people into believing they are out in front of the problem. They appear to be reacting to the stock market declines of the last few days, which makes me lean to the second explanation. It is more of a slap up side the head than it is an attempt to save a patient who has gone into cardiac arrest. The markets were starting to panic and quick action is often the only effective action.

I think the Fed intends to take the federal funds rate down to 2.5 percent and keep it there for a while. I think the Fed will cut rates another 50 basis points at the next meeting on January 30th to make sure everyone gets the message that the Fed is on the job. They will then make the rest of the cuts down to 2.5 percent at the next few meetings after that. They seem to think inflation will remain under control which appears to be a view shared by the various financial markets.

It is worth noting that the Fed sees its job as keeping inflation under control. If evidence were to surface that inflation in food and fuels is spreading to the rest of the economy their willingness to hold interest rates down to help the economy could evaporate.