I am not a fan of the Fed’s “surprise” 75 bp rate cut, for three reasons.

First, it is far from clear that the economy – as opposed to Wall Street – requires such dramatic stimulus. Available evidence suggests GDP expanded in the fourth quarter. Real interest rates were not high before today's action and the Fed did not feel the need to cut by more than 50 bp in a single move in the last two recessions. (The last decline in the Fed funds target rate of more than 50 bp occurred in August 1982, when the economy had been contracting for over a year.)

Secondly, cutting rates nine days before a scheduled policy meeting creates the (probably correct) impression that the Fed has been panicked into action by global equity market falls. Investors will now expect further reductions if equities continue to weaken, regardless of the wider economic context.

Thirdly, the move leaves the Fed’s reputation as an inflation-fighting central bank in tatters. The statement issued after the December meeting warned that “some inflation risks remain” and subsequent news has confirmed that assessment. Premature easing risks boosting inflationary pressures without any positive impact on economic activity (see here).

The Fed’s move has led to speculation about a 50 bp reduction in UK rates at or even before the MPC meeting on 7th February. My MPC-ometer model suggests a cut of no more than 25 bp is warranted by current economic and financial indicators. The MPC rejected calls for easing earlier this month from distressed retailers; it should be similarly sceptical of demands for “emergency” action from financial operators.