As pretty much everybody knows the FED cut the overnight lending rate by 50 basis points as well as the rate at the discount window 50 basis points yesterday.  The question is, what does it actually mean and what will it accomplish.

My take on the cut 

Personally, I was very surprised at the cut, in my mind it was even split between the FED holding steady and a 25 basis point cut.  The reason being is that we are facing some very significant inflationary pressures right now ($82/barrel oil anyone) and also the US dollar which is hanging precariously at all time lows.  Interest rate differentials are one of the main drivers in currency markets, and is the dollar drops anything we import (oil, anything from Walmart, etc) will get significantly more expensive thus creating even more inflation and harming the economy.

The fact that they cut this much indicates to me they are very worried (more than they let on) about the credit markets and the spillover effects to the economy.  The FED does have access to some data which is not publically available yet to make their decision.  While I think that were headed for some rough times economically, I worry the effect of the cut (both timing and size) may actually have the opposite effect. 

What it probably means for mortgage rates

The FED fund rate actually has very little effect on mortgage rates.  Fixed rates are usually much more closely tied to the 10 year treasury and adjustable rates to the LIBOR.  The ten year treasury yield actually rose after the FED cut rates and is now sitting about 12 basis points above where it was before the cut.  This indicates the bond market (which the FED has almost no control over) did not like what they saw and are beginning to price in additional inflation going forward.  The LIBOR rate that had gone up extremely sharply over the last several weeks due to problems in the credit market, dropped on the FED cut but is already starting to rise again.