It is helpful if you know what the Fed is looking at.

With respect to this most recent 75bp cut between meetings, the Fed is not  being buffaloed by housing market or by housing lenders. They're not looking at the stock market, despite all of the blovation you might hear on CNBC. They're certainly not paying any attention to the commodities markets.

They are, however, paying attention to the downgrade from "AAA" to "AA" of the first monoline bond insurer since 1971. They are paying attention to the ramifications of monoline insurers running out of capital to cover losses due to credit default swaps on CDO's.

The problem here is that people think the clowns on TV are bullying the Fed into action.

I agree that is a bad, bad perception.

The reality is that the vast majority of the US investing public, including a lot of professionals in the stock and commodities markets, are unware as to what is going on in the usually stodgy and boring bond/credit markets. Since last August, the bond markets have not been boring or stodgy, but most people simply do not understand or comprehend the linkages and importance of credit markets. The Fed is looking at the bond markets and especially the banking system, which is under pressure as it has not been since the 1930. If you think the Fed's actions are reactionary, what would you make of the European Central Bank's injection of a half-trillion dollars into the EU's banking system for 10 days prior to Christmas?

The problem is that there are linkages heretofore unseen that are blowing up and blowing up faster than the major money center banks and the central banks can respond to them. 

For example, here's a linkage I'll wager that most here haven't seen until now:

If more people continue to default on their mortgages (regardless of the credit tranche of the mortgage - I don't care, sub-prime, prime, Alt-A, option-ARM, whatever - I don't care now, and neither does the credit market - they're all starting to default higher than projections made when CDO's were created), CDO's get marked down. CDO's used to be held off the balance sheets of many of these banks, but investor pressure on the banking management is forcing them to "come clean" and pull these "type 3" assets back onto their balance sheets and mark them to market.

This is causing many CDO's to bring a couple dimes on the dollar of face value. This in turn is causing some of the CDO holders to invoke the credit default swaps made on the CDO's. The other end of the CDS is often held by the monoline bond insurers - companies like Ambac and MBIA.

What was the primary business of these monolines before they decided to get stupid and write CDS's on CDO's?

Insuring your state & local muni bonds. Bonds made to allow your communities to build schools, roads, bridges, etc. Bonds normally thought of as "safe" and "boring." Bonds made even safer because they're backed up by these monoline insurers in the remote event that your local government is as stupid as California's state government, spending money you don't have and won't have for the next 100 years.

As more and more capital is drawn down on Ambac and MBIA, the credit ratings agencies, who previously had been smoking the finest quality crack cocaine when they rated CDO's containing sub-prime crap "AAA," are now taking down the credit ratings of everything in sight as fast as they can to exculpate themselves before the NY State AG, various lawsuits and ultimately the SEC and the US Congress investigate them. They took Ambac from AAA to AA last week. The ratings houses are looking at the rest of the bond insurers out there, and they're not liking what they're seeing.

If the monoline insurers are taken down, that will cut the credit rating of your state and local municipal bonds, which those monoline insuers insure. That means that when your local government wants to issue muni bonds, they'll have to pay a higher interest rate to attract investors. Oh, and the declining housing market, coupled with people screaming to have the assessor re-assess their homes' values down to the current market, will cause a decline in tax revenues for paying back your general obligation muni bonds. That will also demand a higher interest rate be paid.

So: The cut on the monolines and your declining tax base means that... (drum roll please)

You're going to pay more in property taxes. If the monolines fail, you're likely going to be paying a lot more.

That's what the Fed is paying attention to. Not the screaming idiots on CNBC. The timing is unfortunate, but do not mistake correlation with causation here. The bond market (and the entire banking system) is where the concern is.