Fed fears unplug the stock market

The stock market didn’t take kindly to the Federal Reserve’s modest rate cut Tuesday afternoon. The Federal Open Market Committee cut its fed funds overnight lending target by 25 basis points to 4.25 percent and cut its discount rate for emergency borrowing by the same amount, to 4.75 percent. Financial stocks cratered, with brokers Lehman Brothers (LEH) and Bear Stearns (BSC) dropping 5 percent and mortgage lender Countrywide (CFC) dropping 7 percent, on fears that credit will continue to tighten, hurting banks’ bottom lines. Not helping matters some slightly softer-than-expected earnings guidance from onetime market stalwart General Electric (GE).

But what seemed to scare investors most was the Fed’s commentary, which suggested that the central bank isn’t itching to cut rates any more than is absolutely necessary in the face of decent economic numbers and a weakening dollar. Of course, another way to look at that is to point out the disconnect between the weakening economy and the still strong — until this afternoon, at least — stock market.

“It looks like equity traders will be forced to acknowledge what consumers, bond traders, and reality-based observers already know,” writes Michael Panzner on Financial Armageddon. “Conditions and confidence are spiraling downward, and there is not much that those in charge can do about it.” Not for today, at least.