FOMC surprise rate cut of 75 basis points

The Federal Reserve Open Market Committee cut the overnight Fed Funds rate 75 basis points (3/4 of one percent) to 3.5%. Similarly the discount rate was cut 75 basis points to 4%.

This was due to severe drops in the stock markets last week and a fall in excess of four percent in the S&P and the Dow yesterday in futures markets which had remained open despite all other markets being closed for the Martin Luther King Jr. holiday.

This rate cut was a surprise only in timing and possibly marginally in magnitude. The Fed was sure to cut at the end of its two day meeting on 30Jan and the cut was likely to be at least 50 basis points. With the dislocation in the markets the Fed decided to show the flag a little early.

This will almost certainly take any move off the table next week so the net change may be limited. Overall though it was the right move as equity markets approached panic and that's what the Fed should be doing.