The Federal Reserve conformed with median expectations, cutting the Fed Funds and Discount rates 50bp on Wednesday, just over a week since its surprise 75bp cut. In addition, the Fed stoked expectations for further easing by noting that "downside risks to growth remain" and that the Fed would "act in a timely manner as needed to address those risks." There was one dissenter, Dallas Fed Fisher, who preferred not to take any action. It was the fourth meeting in a row at which there was a dissention of some sort. The curve steepened in response to the action as short and intermediate Treasuries rallied while the long-bond fell in price. For the day, the yield on the two-year Treasury fell 12bp while the ten-year fell 1bp. Stocks initially rallied following the FOMC announcement but gave up all of the post-FOMC gains by the close, ending the day with slight losses. In other news, Merrill announced it will exit the CDO underwriting business and UBS announced a $14 billion loss on subprime and related securities. Fitch downgraded FGIC, as expected, to AA and maintained its negative watch. MBIA, after the close, reported a startling $2.3 billion loss ($18.61 per share). Warburg Pincus, which had previously agreed to invest $1 billion in MBIA, invested only $500mm. S&P announced that it was downgrading more than 8,000 securities totaling over $500mm, mostly mortgage (almost all subprime and home equity) and CDOs. It was the biggest such announcement since the waves of downgrades began last year. S&P noted that the downgrades could create a downward spiral in prices for some issues and is likely to begin impacting smaller banks, credit unions, GSEs, and overseas investors. This morning, bond prices are higher and stocks expected to open appreciably lower. The morning's economic data has had little impact. The sharp spike in initial jobless claims was distorted by the Martin Luther King holiday. Tomorrow, the ISM manufacturing index and January payroll data will be released.

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