By James Langton

(March 20 – 14:30 ET) – The U.S. Federal Reserve Board cut interest rates by 50 basis points today, as much of the market expected, lowering its target for the federal funds rate to 5%.

The Fed signaled a bias toward future easing, if not an aggressive cutting stance. “The risks are weighted mainly toward conditions that may generate economic weakness in the foreseeable future.”

In its policy statement, the Fed alluded to weak equity markets, noting, “Persistent pressures on profit margins are restraining investment spending and, through declines in equity wealth, consumption. The associated backup in inventories has induced a rapid response in manufacturing output and, with spending having firmed a bit since last year, inventory adjustment appears to be well underway.”

The Fed continues to observe weakness but appears to remain unconvinced that the slowing is as precipitous as some believe. “Although current developments do not appear to have materially diminished the prospects for long-term growth in productivity, excess productive capacity has emerged recently. The possibility that this excess could continue for some time and the potential for weakness in global economic conditions suggest substantial risks that demand and production could remain soft.”

In the days leading up to today’s decision a noisy debate raged over whether the Fed would go for a 50 bps cut or 75 bps. Outlying opinions were also heard suggesting a cut as small as 25 bps or as large as 100 bps could be in the cards.

Markets were mostly up ahead of the release of the Fed announcement. Major indices sold off immediately in the wake of the decision, but have since recovered as it appears markets are reacting favourably to the decision.

Many traders saw the market calling for 50 bps, but were bidding up a little on the faint hope for 75. However there was also a faction arguing that 75 bps would signal panic on the part of Fed chair Alan Greenspan. Today’s decision may also close the door on the liklihood of inter-meeting rate cut, which would be an even more aggressive tool to bail out the slumping U.S. economy.

The debate leading up to today’s decision has been seemingly endless. If there’s any consolation in it, the Fed doesn’t meet again until mid-May.