This morning the Federal Reserve starts one of its regular meetings. The interest rate futures markets are predicting 100 percent probability of a 75 basis point cut and a very high probability of even a 100 basis point cut. Toomre Capital Markets LLC ("TCM") hopes that these market expectations are disappointed. Hopefully, the Federal Reserve only cuts its short-term rates by 50 basis points.

The Federal Funds rate is currently 3.00%. In the last week, the Federal Reserve has taken several major steps to get the needed liquidity to the financial market community. The new funding program that starts later this month allows the Wall Street dealers to fund $200 billion of mortgage-backed securities through Federal Reserve repurchase agreements. Further, the Federal Reserve has agreed to finance $30 billion of the least liquid securities from the Bear Stearns inventory. Finally, the Federal Reserve has opened up its discount window to the twenty or so primary dealers that for the first time includes all of the major investment banks. Some of the language from the Federal Reserve also suggests that the primary dealers are encouraged to use the discount window in the event that some of their large customers (like hedge funds or mortgage REITs holding agency MBS) have funding difficulties.

A cut of only 50 basis points is sure to disappoint both the bond and stock markets today. And no doubt there will be more calls that the Federal Reserve is "behind the curve." However, market participants forget (or do not appreciate) just how simulative the 225 basis points cuts already made truly are. Nor do they fully appreciate how stimulation is coming down the pike in the third quarter with the rebate checks passed by Congress and signed into law by President Bush. However, a cut of 50 basis points will allow the Federal Reserve to keep its powder dry for the impact of further rate cuts, if needed. And such a "small" cut is also likely to be a surprise to the foreign exchange and commodity markets. I might suggest that with the Federal Reserve having addressed the liquidity concerns of its primary dealers that the next major issue is getting the dollar stabilized and reducing some of the speculation that has become concentrated into the broad commodity markets.