Why on earth the FOMC would want to undo any of the work by Treasury with a rate cut? The whole idea of letting Lehman die is to reintroduce the concept of risk and eliminate some of the Moral Hazard fostered by prior bailouts.
The current market bet is that a 25 or even 50 basis cut may occur at tomorrow’s Fed meeting.
That would be ill advised.
We have survived the initial impact caused by the collapse of Lehman Brothers (LEH). AIG is certainly in trouble, as are Wachovia (WB) and Washington Mutual (WM) and others.
The Fed would be well served, with rates now at 2%, to keep some powder try for the latter innings of this crisis.
Unless we are looking to emulate Japan’s 15 year recession, a ZIRP/pushing on a string policy would not be advantageous.