The stock market finished strongly today. Some of it was attributed to positive news about the municipal bond insurers. However, I believe much of it was due to the belief that the Fed will continue cutting rates as necessary to cushion the slowdown or a potential recession.
Prior to the recent FOMC statement and the inter-meeting rate cut, the Fed was sending out mixed signals regarding rate cuts. It tried to establish its credentials as an inflation hawk; however, it also left uncertainty about its ability to deal with a recession. This reduced the effectiveness of the initial rate cuts. Many believe that the Fed would be caught behind the curve in dealing with a potential recession.
The combined decrease in the Federal Funds Rate of 1.25% in the last two weeks along with the accompanying FOMC statement has established the Bernanke Fed's credentials for dealing with a potential recession. It has replaced the current market confusion with confidence in the Fed.
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