Ceding to panic...

Last night's ad hoc FOMC meeting and the resulting announcement of a whopping 75bp cut in rates(last time such a move took place was back in 1982), bringing the Federal Funds Rate down to 3.5% from 4.25% took everyone by surprise. The global market sell off that began on Monday and continued on to Tuesday, reflecting growing worries that the U.S. economy is slipping into recession, added additional pressure on a Fed that had already been battered for its reluctance to nudge from the inflationary bias, prompting it to take drastic action. The one area that seemed to be unscathed by turmoil so far, namely export demand from the U.S. began to falter as markets around the world entered a correction phase, raising worries of a global slowdown.
What is clear is that by not waiting another week, the Fed seems to have lost control of the situation with its credibility somewhat tainted. The Fed carried out this latest move either because it ceded to market pressures (which in itself is not a bad thing given signs of a rapidly deteriorating environment) and/or because it is acting on information that is not yet out in the open.
What is important now is with regards to the future given that investor perception of the Fed has changed somewhat. This change is likely to have consequences not only on the Fed's behavior going forward but also on how the markets will react to it.