Will the Federal Reserve cut rates from a full percentage point?

Who would have imagined it even a few weeks ago, the very real prospect that the Federal Reserve FOMC will decide to cut the Fed's target rate by a full percentage point on Tuesday? Well, it certainly does look like a slam dunk. Futures prices indicate a 100% chance of a full percentage point cut in the Fed target rate.

The truth is that the real economy, the "main street" economy, does not need such a low interest rate, but Wall Street with its garbage mortgage mess to clean up really does need low interest rates to "profit" its way back to solvency.

For the past seven months the Fed has been patiently feeding Wall Street liquidity, but the Bear Stearns meltdown and related problems at Citibank, Merrill Lynch, et al, are really issues of solvency, with assets on their books whose market value is quite questionable. Personally, I think a lot of these assets are going to be quite fine over the next few years, but right now with questionable practices at the ratings agencies and questions about counter-party risk and leveraging, a lot of assets are being unreasonably discounted due to firms raising cash even if the values of those assets will pop back up in a few months to a year.

Meanwhile low interest rates are needed to keep Wall Street propped up.

Maybe another big investment bank will fail, but probably not. There may be some smaller investment banks and hedge funds that fail, especially those who have been leveraging up on commodities to try to recoup losses on mortgage securities.

In any case, I would be surprised if the Fed does not deliver the full percentage-point cut on Tuesday, albeit with a disclaimer that it will rapidly hike rates as soon as Wall Street looks like it is back on its feet.

 -- Jack Krupansky