Fed rate cut is likely, but that's not what matters

Everyone seems very excited about the likelihood of another Fed rate cut, but that's missing the forest for the trees. The seeds of a recovery from this financial crisis have already been sown. Whether the Fed funds rate target is 1.5% or 1% is not going to make much of a difference. The big changes to focus on have already happened:

The Fed has quadrupled the amount of bank reserves in the system in the past six weeks, enough to easily accommodate the world's sudden thirst for dollars.

The Fed has pumped $100 billion or so into the Commercial Paper market in the past two days, in order to alleviate a drastic shortage of liquidity.

Swap spreads are way down from their highs, reflecting an easing of tensions in the institutional money markets.

Real yields on 5-year TIPS have doubled in the past three weeks, ostensibly because of collapsing commodity prices and deflation fears, but really because the prospects for the economy have brightened considerably (the economy is much more likely to grow with oil at $65 than with oil at $150).

The dollar has jumped almost 20% in the past two months, pulling back from the abyss it was headed into earlier this year and reflecting a more balanced assessment of the economy's prospects.