Foremost, the move signals policymaker's heightened concern over the risks of an U.S. recession next year. Since the last FOMC meeting in late-September, financial markets have remained in upheaval. Equity prices continue to founder and credit spreads in the bond market continue to remain extraordinarily wide. Banks and other financial intermediaries also appear to be increasingly reluctant to extend credit. BankAmerica's recent astonishingly large hedge fund related losses, on top of numerous other poor bank earnings reports, illustrate that the banking sector is under significant pressure to be more cautious.
Confidence also appears to be eroding.
Consumer and business confidence measures are all falling quickly. The Fed is also signaling by its move its intention to be vigilant and aggressive in heading off an economic downturn. Just how aggressive the Fed was going to be was called into question by financial markets when policymakers decided to cut the funds rate by only 25 basis points at the September FOMC meeting. Financial markets were clearly disappointed that the cut in rates wasn't larger. This move should convince investors that the Fed will move quickly.