Today Thursday's late market rally - after a sharp plunge of stock markets during the day - was certainly supported by the repeated rumors of an emergency FOMC meeting to cut the Fed Funds rate and stem the bloodshed in financial and credit markets. 

But the reality is that the Fed has already cut this past week the Fed Funds rate by about 50 basis points. Indeed the effective funds rate - as opposed to the target of 5.25% - has averaged only 4.79% in the latest statement week. So for all matters and purposes the Fed has already cut the Fed Funds for the last week.

Whether the Fed will formalize this cut via an inter-meeting emergency cut or not is anyone's guess; market analysts are now predicting such an emergency cut and investors are hoping for one.

Given the serious insolvency - rather than just illiquidity-  among many economic agents (many mortgage-burdened households, dozens of mortgage lenders, homebuilders, some hedge funds and financial institutions, some distressed corporates) a formal 25bps cut will not make much of the difference as you cannot solve an insolvency problem by throwing liquidity at it.

But markets are now begging for a Fed bailout and, unless the Fed provides one before the next formal FOMC meeting, the current financial turmoil, liquidity crunch and credit crunch is likely to sharply worsen.

On the real economy side the significant tightening in financial conditions implies a serious further slowdown in economic activity: a deepening housing recession, a significant retrenchment in consumption spending and a deepening of the capex strike by the corporate sector. Unless financial conditions significantly ease soon the chances of an economic hard landing will significantly increase.

Friday Morning Update: The Fed just announced a 50bps cut of the discount rate from 6.25% to 5.75%. Apart from the psychological effect - higher probability now of a Fed Funds cut rate and signal that the Fed cares about this financial turmoil - this cut of the discount rate is mostly cosmetic as very few banks access the discount window. More importantly, the Fed extended the normal term of lending to banks from overnight to 30 days. And the FOMC statement effectively has changed the Fed policy to an easing bias. At this point a 25bps Fed Funds cut at the September meeting is almost sure; and an inter-meeting cut is possible if financial conditions deteriorate before the September meeting.