Fed cuts fed funds rate 0.25 percent to 4.25 percent: Market reaction

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While the action was widely expected, some economists had thought the Fed might offer a larger 0.5 percentage points to help the U.S. economy withstand tightened credit and a prolong housing market slump.

In a related move, the Fed cut its discount rate for direct loans to banks by a matching 0.25 percent to 4.75 percent.

The Fed has now cut overnight rates by 1.0 percentage point since mid-September.

COMMENTS:

JOHN LONSKI, CHIEF ECONOMIST, MOODY'S INVESTORS SERVICE, NEW YORK, NEW YORK:

"I think there's going to be some disappointment that the cut was only 25 basis points given the fact that we did have a widening of credit risk premia and a widening of the spread between Libor and T-bills leading up to this meeting."

"By cutting by only 25 basis points, the Fed effectively conveys its sense that recession risks are not as great as what market participants believe. In other words, the Fed sees recession risk as being less than 40 percent whereas the market sees recession risk as at least 40 percent."

"Again, the shallowness of the rate cut is somewhat surprising given that the economic outlook has worsened since October 31 and there has been a noteworthy widening of spreads since the 31st of October. All of this is to suggest that the Fed is fairly confident that what lays ahead for the U.S. economy is nothing worse that a rough patch."

ASHRAF LAIDI, CHIEF MARKET ANALYST, CMC MARKETS, NEW YORK

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