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As I'm sure you have all heard by now, the Federal Reserve moved to lower the fed funds rate by 50 basis points yesterday to 4.75%. The Fed also lowered the discount rate by 50 basis points to 5.25%. Stocks were clearly thrilled with this news as they reacted extremely strongly to the upside following the announcements. Before the announcement yesterday much of the talk was that 50 basis points was becoming less and less likely. Most people assumed the Fed would move 25 basis points. As the news of the 50 basis point cut and the accompanying statement came out many strategists were surprised at just how quickly the Fed had decided to move. This was the same Federal Reserve that just last month was more worried about inflation than an economic slowdown or recession.

What changed the Federal Reserve's mind so quickly in just a month's time? The picture in the fixed-income markets has become much more clear since that time, and the picture isn't pretty. The housing market continues to deteriorate at levels that could threaten the health of the overall economy. Several pieces of economic data came in far weaker than expected in the last month. I believe the two economic reports that were most troubling to the Fed were the employment report, and the consumer confidence number from August.

Does this mean its up up and away for the stock market? Well at least for yesterday it did, but in the intermediate term its certainly not a given. The question is now, did the Fed move by 50 basis points because they believe a recession is imminent? If the economy is going into a recession right now, the 50 basis point cut will be too late, and won't help for quite a while.

Now more than ever it will be extremely important to watch the economic data as it comes in. Further hints at a fast arriving recession will be sure to hurt the market. On the other hand, if economic growth is able to continue moderately, and the consumer continues to spend the markets could do quite well.

The Federal Reserve's move to cut rates by 50 basis points was likely a good one. I believe the Fed understood the risks that are very real to our economy at this point in time. Certainly inflation measures will have to be watched, but the Fed can always move to raise rates again when the situation becomes more clear for the nation's economy. Given the recent string of economic data pointing to an impending recession, the 50 basis point move makes a lot of sense.

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