I think the media is misunderstanding Fed Governor Randall Kroszner. His speech delivered yesterday at the Conference on Competitive Markets and Effective Regulation has been interpreted as favoring no more cuts. The money quote:
"A sequence of data releases consistent with the rough patch for economic activity that I expect in coming months would not, by themselves, suggest to me that the current stance of monetary policy is inappropriate."
I know most people, even most pros, don't actually read the speech and instead just read the story on Bloomberg or the Wall Street Journal. But if you bother to actually read the whole speech, there is much more time spent on the weaker growth picture. Consider this reality: the Fed has cut 75bps, which is historically an extremely tepid easing cycle. Furthermore, the current environment has a larger tail risk than some past down cycles.
There is some non-zero probability that subprime losses will take down one or more large banks. I don't think the odds are high, but the possibility exists. What if this causes a crisis of confidence in our banking system? Furthermore, its possible, however likely, that banks will tighten consumer lending practices to the point that consumer spending plummets. Or that losses in consumer lending lead to extremely tight business lending.
Kroszner himself discusses the outlook along these lines, mentioning "median" and "tail" outcome possibilities. While the media has focused on the quote above, I think his thoughts on reducing tail risk is the key to what the Fed is likely to do next.
So the Fed claims risks are balanced. And maybe this is technically true, in that the median forecasts might suggest that rising inflation and falling growth are both about as likely. But the tail outcome for growth is too disastrous to ignore. And the Fed knows they have the tools to let banks earn their way through this period through carry.
Look for more cuts. Several more.