25 bps

I would cut 25 bps and and here is a quick not well edited sample statement:


The Federal Open Market Committee decided to lower its interest rate target to 4-1/4 percent.

Recent data suggest that economic growth has been solid and that employment growth remains strong. However, since the committee's last scheduled meeting conditions in financial markets have deteriorated, approaching levels present this summer. In addition, the ongoing correction in the housing market and the associated disruptions in the market for subprime mortgage backed securities threatens the outlook for growth.

Core inflation has continued to moderate as expected though commodity prices have remained elevated and the committee judges that some risks to inflation remain.

While risks to both inflation and output remain the committees predominate concern is that further weakness in financial markets will lower the outlook for growth. While today's action reduces the risk for further financial deterioration the committee will continue to evaluate data as it becomes available.

In a related action the Board of Governors unanimously approved a 25 basis point decrease in the discount rate.

The language here is meant to give room for another move in the discount rate in late December or early January should things fall off a cliff. The worry is that the Fed needs some tool to calm the market if and when things start going bad without spooking them because of unexpected Fed action.

With this we can set up a one-two punch, 25 bps here and a possible cut at the discount window around the new year. The hope is that will get things functioning back to normal. Its going to take some time for exports to come to the rescue but if we can keep the bottom from falling out until next summer I think we have reasonable shot at making this a mild recession.

The worry of course is with some securities going from AAA to worthless (yes, I don't mean junk or even default I mean nothing, nada, not a dime, no recovery whatsoever) in less than a year its hard to see how there aren't some significant freeze up in credit markets.