Jan. 22: Dow 11,971 (down 128 points); trading range, 658 points

The specter of continuing the ugliness seen overnight in the global equity markets and a 95% decline in fourth-quarter (2007) net income at Bank of America (NYSE: BAC) combined to shake up those in charge of U.S. monetary policy.

So, facing the possibility of a 500-point drop in the Dow following the long holiday weekend, the Fed sprang into action early to shore up the markets.

The move was a 75-basis-point pre-market intermeeting cut just eight days before the Fed's regularly scheduled meeting to drop the fed funds rate to 3.5% and the discount rate to 4%. The Fed made this move "in view of a weakening of the economic outlook and increasing downside risks to growth," adding, "appreciable downside risks to growth remain."

The Dow battled all day to recover from an early session drop of 459 points to close down only 128 by the closing bell.

Greg Tucker is the executive editor of OptionsZone.com.

This strategy went from being a modestly successful trade through October to a hero-sized trade in the past 45 days.

The Fed funds rate, the most widely followed interest rate the banks charge each other for overnight lending, topped out in August 2006, at 5.25%.

When the Fed started easing rates thereafter, no one at the economic think tanks forecasted anything close to what we are seeing today (namely a Fed funds rate of zero to 0.25% -- a decline of a full 5% in 17 months).

The decline in rates started out so orderly and coordinated that it seemed almost too good to be true, and the Dow Jones Industrial Average hit an all-time high, topping 14,000 for the first time in July 2007.

However, the quarter-point cuts gave way to a three-quarter-point cut, or 75 basis points, on Jan. 22, 2008, signaling that the Fed was seeing a material breakdown in the credit and housing markets. Following that seemingly radical rate cut, just eight days later on Jan. 30, the Fed again slashed the Fed funds rate by another half point, or 50 basis points, to 3%.

From there Bernanke & Co. held steady for a couple months to see if any good would come of their efforts.

When evidence of further erosion in the credit markets surfaced with the impending collapse of Fannie Mae (NYSE: FNM), Freddie Mac (NYSE: FRE), Indy Mac, Bear Streans and Lehman Brothers (OTC: LEHMQ), the Fed lopped another three-quarters of a point off the Fed funds rate, taking it down to 2.25% on March 18.

That was considered the absolute floor at the time, a level that would stick. But that wasn't the case.

The Federal Reserve just announced a bigger-than-expected rate cut. And with that, it has used up its short-term rate cutting ammunition for the first time in history.

The sad part is that even though the Fed has been cutting rates -- from 5.25% last summer to today -- the economy has not responded.

The specifics of today's rate cut are historic. The Fed lowered its target for the overnight federal funds rate to a range of between 0% and 0.25% -- a record low. Even though it's a historic low, today's announcement was ratifying the market reality -- demand for interbank loans has been so low that the actual Fed funds rate has been at 0.1% in the last several days.

The problem is that even though we are in a financial meltdown caused by too much borrowing, the Fed has decided that the best way to solve the problem is to get people to borrow more. But they don't want to lend the money that the Fed is giving away. Meanwhile, prices dropped in November by 1.7% -- more than ever in recorded history -- due largely to a rapid decline in energy prices.

TheStreet.com's Jim Cramer says the paltry half-point cut means we're headed lower once again.

Wrong!

The European Central Bank needed to move in lock step with the Bank of England. It left us hanging with a half-point cut.

That means we're sunk again.

The near-term tug of war just got uglier. Without the ECB cutting as much as the BOE, we have no reason to buy.

Period.

Last night, in a meeting with a bunch of hedge fund managers, there was uniform agreement that the market has to be bought with huge rate cuts, that you need to ignore the near-term Cisco (NASDAQ: CSCO) (Cramer's Take) (to use the generic version of crummy earnings) and go with the Wells Fargo (NYSE: WFC) (Cramer's Take) offering that will make it so lending will come again and demand be spurred.

The Federal Reserve couldn't wait until October 29th to cut rates. Instead, it slashed its Fed Funds rate 0.5% to 1.5% in a move that was coordinated with other central banks. Interestingly, Milton Friedman's acolyte, Anna Schwartz, recently observed that Fed Chair Ben Bernanke, who is reportedly a student of the Great Depression, is taking the wrong approach to this crisis.

Milton Friedman is widely regarded as the economist who figured out that a lack of liquidity is the reason that the economy took such a tailspin after the crash of 1929. Schwartz, 92, co-authored A Monetary History of the United States 1867-1960, with Friedman. And her assessment of Bernanke is brutal. She thinks he should be fired. The reason? She believes that he and Paulson made a huge mistake in bailing out failed companies. In her view, they underestimated the free market's ability to recover from such failures.

Scwhartz also faults them for issuing dire warnings about how capitalism would fail unless Congress passed their bailout bill. I guess Friedman and Schwartz have influenced my thinking as reflected in this post about letting free markets work and this one questioning the fear tactics used to sell their program. This morning's emergency rate cut suggests that for all the fear mongering used to sell their program, its effect has not helped the markets, which have lost $2.8 trillion since the day investors thought the bill would pass.

Milton would have let the failed institutions fail. But it's too late to know whether his ideas would have worked.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

TheStreet.com's Jim Cramer says you can use the bounce today to sell names with earnings troubles.

A suggestion: If you know that your company has earnings problems, you are going to get a lift today that will allow you to get out at a better price. What do I mean about earnings problems? Let's consider Alcoa (NYSE: AA) (Cramer's Take). That was a dismal quarter. The stock would not be up if it weren't for the rate cuts.

Or how about the financials? We learned last night that MetLife (NYSE: MET) (Cramer's Take) needed a lot more capital. We have to presume all insurance companies need more capital. So get ready or sell and buy lower. Citigroup (NYSE: C) (Cramer's Take) is in the same boat. It is not going to have a good quarter and it needs to do a capital raise. You are going to get a terrific opportunity to sell today.

I also feel the same for most retailers. We have to be very careful here because unless you are in a retailer that picks up share in hard times, you need to use the strength to sell.

What can be held? I think that you can keep the stocks with good dividends that are able to pay them. You can certainly buy stocks that are trading near their cash.

Most analysts believe that the Fed will not make an emergency cut in rates. The decision is a mistake and the agency will live to regret it.

According to Reuters," Federal Reserve policy-makers are expected to stop short of lowering U.S. interest rates at a meeting on Tuesday ." Bernanke & Co. will probably state a willingness to bring rates down if it feels that the economy needs to be protected.

The economy needs to be protected now. Wall Street is not the only part of America that is coming apart. The number of people out of work is rising according to the government's own data. With layoffs in the financial sector and at companies including Hewlett-Packard (NYSE: HPQ), which yesterday cut almost 25,000 jobs, the mass of people out of work will continue to rise sharply.

The average middle class American has not only lost all of the equity in his home, he now faces a sharp drop in the value of the portion of his retirement invested in the stock market.

If the current situation is not an emergency, what is?

Douglas A. McIntyre is an editor at 247wallst.com.

TheStreet.com's Jim Cramer says this commodity collapse is giving the Fed room to cut.

As the Fed meets and the credit crisis still roars, it is worth assessing all of the chatter that the Fed can't do a thing and that every aspect of everything is all bad. I put it like that because it is hard to read anything without concluding that there will be high-double-digit defaults and that the credit markets haven been crushed and are not useful and the world is, well, coming to an end.

Funny thing: when the world comes to an end, you get a collapse in commodities, which is what is happening right now; it is something the Fed should keep an eye on. That's because there is suddenly more room to cut if necessary, and that matters because the banks need it -- they need more room to make money on net interest margins and playing the curve, because we all know that they need capital, and this is a good way to raise capital. It is the way that capital was raised for BankBoston and Bank of America (NYSE: BAC) (Cramer's Take) and Chase and Citigroup (NYSE: C) (Cramer's Take) in the old days, and it would be the same again if the Fed needs to help.

In other words, caught in all the gloom is the fact that the Fed is winning, and with winning comes flexibility. I expect nothing from the Fed, nothing, but I also want to remind people that the "Fed will raise soon" talk makes no sense whatsoever now, even though the drumbeat was really loud just a couple of months ago.

The Federal Reserve Bank of Kansas City released its Beige Book Report detailing economic activity among the twelve Federal Reserve Districts across the country. The pace of economic activity was quite sluggish throughout much of the country. At the same time, there have been hawkish comments recently by several Fed governors. This leads us to the question of the possibility of a Fed rate increase on the horizon.

However, one must remember that hawkish talk is quite different from hawkish action. As I have said in my book, Follow the Fed to Investment Success, "watch what the Fed does not what it says."

The Fed has given no indication that an imminent raise in interest rates is forthcoming. There have simply been hawkish comments, which are an incredibly inexpensive means of maintaining its inflation-fighting credentials. However, every time market turmoil arises, the Fed adopts a more conciliatory tone.

Fed rate cuts help people who hold adjustable rate mortgages (ARMs) but they're less valuable to people seeking new mortgages.

That's because ARM rates reset periodically -- e.g., every year -- based on an index plus a lender's margin -- the amount a lender adds to the index, usually two percentage points or four percentage points, to set the actual interest rate of the ARM. The most common index for ARM adjustments is the one-year U.S. Treasury bill.

Last Friday, the one year treasury rate was at 1.88% -- down 3.04 percentage points below the 4.92% rate it was at in April 2007. The Fed's rate cutting has lowered the rates at the reset periods for those who already have adjustable rate mortgages. So a person who paid 2% plus the 1-year t-bill rate in April 2007 would have paid 6.92% during the last year and enjoyed a reset to 3.88% as of last week.

Not at all surprising, the Federal Reserve has announced it cut its benchmark federal funds rate by a quarter percentage point, to 2%. Further, it also signaled it would pause the recent policy of rate cuts as it removed some language that was previously present in the statements regarding downside risks to economic growth.

Despite the move being fully expected, especially after today's GDP report showed the economy hasn't contracted and that inflationary pressures weren't as high as presumed, the stock market reacted positively and Dow Jones Industrial Average topped 13,000 for the first time since January. Better than expected results from General Motors (NYSE: GM) and Procter & Gamble (NYSE: PG) also added to the positive sentiment.

Fannie Mae (NYSE: FNM) is recently up $4.99 to $27.17. Goldman Sachs lowered its 12-month price target to $16 from $24. FNM call option volume is 46,713 contracts, compared to put volume of 64,318 contracts.

FNM April option implied volatility of 98 is above its 26-week average of 58 according to Track Data, suggesting larger price risk.

The Volatility Index (VIX) is down 3.26 to 28.98.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

With the Fed rumored to be contemplating a rare 100 basis point rate cut, it's worth considering whether this policy is doing any good. I'd say those rapid rate reductions are doing more harm. Here's why: non-stop interest rate cuts make business lose confidence in the Fed – since those cuts are ineffective – while signaling that economic conditions are desperately bad or that the Fed is panicking and unable to fix the problem.

I think the problem is that banks and other owners of Collateralized Debt Obligations (CDOs) and other asset backed securities have not accounted yet for the true loss in value of these securities. Therefore corporations and others that deal with the banks don't know whether those institutions are solvent. The solution would be to write down the value of those assets and then recapitalize the banks to the extent of the write downs.

While the non-stop interest rate cuts do not solve what's ailing the credit markets, they also accelerate inflation. This causes businesses to hoard their money because they expect that it will be worth less in the future. In effect, the Fed is creating very high inflationary expectations which creates a very high hurdle rate for investments – and in a slowing economic climate, there are not many investments that can earn a high enough return to get green-lighted.

Reuters reports that like last week, the global markets are cratering. The question is whether the Fed will come in with the same emergency 75-basis-point rate cut it used last Tuesday when U.S. markets opened to damp the downturn. Here's the damage:

• The pan-European FTSEurofirst 300 was down 1.3%, taking January's losses close to 13%
• Nikkei dropping nearly 4%

In addition to the $150 billion stimulus package, the Fed is already expected to cut interest rates again this week; interest rate futures show the market is betting on another 25 or 50 basis points in cuts, possibly taking rates as low as 3.0%.

But with Dow futures down 57 at 7:15 a.m., it looks this morning like it's not enough -- the Bernanke Call -- investor's expectation that his rate cuts mark a ceiling below which the market will tumble -- appears alive and well. I wonder whether Bernanke will try another emergency rate cut this morning.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

The Federal Reserve Board and Chairman Bernanke are not done cutting. Last week before departing on holiday I posted Serious Money: 1% drop by Fed is possible and I awoke today to find that Ben is reading my posts. Today's cut is just the beginning. Today was the rough cut; next week The Fed will be sanding around the edges trying to smooth the markets out with possibly another quarter or even half a point cut.

What's the hurry you ask? I discussed that last week. The Fed needs six months for the impact to be felt by the overall economy, and more importantly, prior to us walking into the polling booths on election day. That means: cut now, polish later. You will be seeing and hearing the politicians all running in front of the parade come summer -- count on it!

The banks and retailers are up solidly today as I write this because the cut will help banks in two ways. It will create more borrowing, and the latent rate reductions in "increased margin spreads" will mean higher short term profits. The retailers are up as speculators believe consumers will head back to the stores ... that may be premature.

This morning, the market has been extremely volatile, which personally is very ironic because I am writing this from the foot of the Arenal Volcano in Costa Rica.

If you want to buy into this market, the best way to do so is to dollar cost average into the index funds and ETFs. Read last weeks post - got to run...

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. Read his Chasing Value and Serious Money columns.