The situation changed drastically in early afternoon, when the Federal Reserve Board took Wall Street completely by surprise, and cut the Federal Funds rate by half a percent, and the Discount Rate by a quarter percent. The Fed said it acted because of increased risks of a steeper economic downturn. In theory, you might have expected stocks to sell off on the news, with fears of more dire earnings warnings ahead from major corporations, but instead, the stock market took off to the upside in record volume.

After a momentary rally, the bond market became very unhappy with the equity surge, and the result was massive selling, which caused Treasury yields to shoot sharply higher. Mortgage points also rose, but not as severely.

But the trend may still be toward lower rates, if economic slowing continues despite the Fed's dramatic move. It's a well known fact that a Fed rate hike or rate cut does not have maximum impact for about nine months. And unless the economy executes a 180 degree turn, the prospect of slower growth or even contraction is still looming. In Tuesday's National Association of Purchasing Managers manufacturing survey results, the compilers found the likelihood of a tiny +0.5% rise from January through March for the gross domestic product, a key measure of all good and services produced in the USA. If we slip into the minus column for two successive quarters, that will qualify as a recession.

The Federal Reserve Board's goal has been to bring us into a "soft landing," which would be defined as holding GDP above the breakeven point. Now, the Fed's task is seen as more difficult, since many economists are openly saying we could cross the line into a downward spiral. They point to cutbacks in auto production, a rise in weekly first time claims for unemployment benefits, and the tumble in the NASDAQ to support their position.

With the Dow Jones Industrial Average at nearly 11,000 at Wednesday's close, it's clear that Fed Chairman Greenspan was more worried about reversing deteriorating consumer confidence, than he was about whether the stock market shot higher again. Perhaps he figures it's a short term phenomenon before traders get back to looking at quarterly earnings results when assessing the price of a stock.