Fed to cut rates today, but does anyone care (besides currency traders)?

It's another "Fed day" today, with the FOMC's two-day policy meeting set to wrap up later and the results to be announced at roughly 2:15 eastern. Market betting is that the Fed will cut rates by 50 basis points to a record-low 0.5%. But one has to wonder if that really matters. The "effective" federal funds rate, determined by actual trading in the market, was just 18 basis points yesterday.

The real question is how will the Fed further explain or define its new strategy of quantitative easing and flooding the banking system with reserves. Or as Bloomberg explains things this morning ...

"The Federal Reserve may today reduce its main interest rate to the lowest level on record and prepare for one of the boldest experiments in its 94-year history: using its balance sheet as the key tool for monetary policy.

"The Fed’s Open Market Committee will probably cut the benchmark rate in half, to 0.5 percent, according to the median of 84 forecasts in a Bloomberg News survey. The central bank may also signal plans to channel credit to businesses and consumers by further enlarging its $2.26 trillion of assets.

"Chairman Ben S. Bernanke plans new steps to combat the credit crunch and prevent the worst recession in a quarter century from turning into a depression. The danger is the Fed’s credibility could be hurt if policy makers don’t clearly communicate a new strategy of manipulating the supply of money, at a time when FOMC members have diverging views on the subject.

“We expect the FOMC to leave the policy outlook open- ended,” said Louis Crandall, chief economist at Wrightson ICAP LLC, the world’s largest broker of trades between banks, in Jersey City, New Jersey. “The FOMC may have no choice but to muddle along for a while longer” because “there is no sign that a consensus on a new approach has begun to emerge,” he said.

"Investor speculation that the Fed will ease monetary policy today pushed yields on 10-year Treasury notes to the lowest since 1954. The dollar traded near a two-month low against the euro and was close to its weakest level in 13 years versus the yen."

The AP expands a bit further on how this Japan-like strategy of quantitative easing works, in case you aren't familiar with the mechanics ...

"Bernanke says the Fed is weighing other ways to aid the economy given that it can lower the funds rate only so far -- to zero.

"For example, the Fed could buy longer-term Treasury or agency securities on the open market in substantial quantities. This might lower rates on these securities and help spur buying appetites.

"A Fed program announced late last month to buy $600 billion in debt and mortgage-backed securities from mortgage giants Fannie Mae and Freddie Mac already has helped pushed mortgage rates down.

"By boosting the quantity of money in the financial system, the Fed has engaged in so-called "quantitative easing" to provide economic relief. The Fed's balance sheet has ballooned to $2.2 trillion, from close to $900 billion in September, reflecting efforts to mend the financial system."

Incidentally, the Fed's policy of quantitative easing continues to hammer the dollar. The Dollar Index has now plunged from a high of 88.46 on November 21 to just 81.77 today (it's down about 49 bps on the day as I write). That's a very large move in a short period of time for currencies. No repercussions ... yet ... in the Treasury market. But like I said, just because something hasn't happened yet doesn't mean it won't.