Ask and you shall receive

Larry Kudlow:

There's a global stock market tsunami gathering force. It may hit US shores very hard this morning.

Much of this is panic over a US recession threat that has yet to clearly materialize. The world sell-off also vastly over-estimates loan and credit problems among international financial institutions.

In any event, world central banks should immediately reduce rates and add liquidity first thing in the morning, no matter what the time-zone.

Fed head Ben Bernanke should have cut rates 50 basis points last week. He should do it first thing this morning. Then cut rates another 50 basis points on January 30.

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CNN reports that the Fed has cut rates by "three-quarters of a percentage point in a bid to stave off heavy losses on U.S. stocks amid a second day of turmoil on global markets."

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The Federal Reserve -- the U.S. central bank --attempted to allay fears by trimming its key federal fund rate from 4.25 percent to 3.5 percent. It also lowered its discount rate -- the rate at which banks can borrow directly from the Fed from 4.75 to 4 percent.

The emergency measure was the Federal Reserve's biggest interest rate cut in since 1984.

"Broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets," the Fed said in a statement. Read the Fed statement

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The loss of wealth in the housing market and the consequential loss of wealth in investment banking firms that invested in that market has reduced the amount of money available for lending and that is what this rate cut is intended to cure. Usually the markets respond well to rate cuts because the economy responds well to rate cuts. So far that appears to be happening according to the CNN story which was written before the US market opened, but European markets were up after the move.

When the Fed cuts rates like this it also strengthens the bond market. Investors who bought bonds yesterday, probably have capital gains today. Bond funds may be a popular investment today also.

FoxBusiness says that after opening down the market is recovering much of its initial loss. This early loss probably reflects orders that were placed to sell before the Fed announcement was made.