Should the Fed get as aggressive as the market?

You know my answer - NO.

Fed acted rightly by doing an emergency 75 bps cut last week when global markets were in turmoil. Market reaction to the emergency cut was neutral to positive. However, most market pundits wanted another 50 bps or more during the planned FOMC meeting on Jan 30. It was suprising to see the Fed act in tandem, doing a massive 50 bps cut. We sure do need swift action to avoid a looming slowdown or recession, however Fed actions need to be viewed from a larger macro-economic perspective.

In an economy where most experts do not yet have a full idea of distressed debt in danger of being written off, its always safer to plan/space out/time monetary policy changes. One too many changes reduce the leeway available later to manage difficult situations that may come up later. Also, its is very dangerous to do drastic rate cuts in an environment where oil prices still hover at over USD 90 a barrell. Rate cuts would potentially cause further dollar depreciation (unless European and Asian economies see reduce rates at a similar rate, which seems unlikely), which in turn would further increase effective oil prices and flare up inflation. This poses some thing which would be most dangerous - stagflation.

Again, the beauty of a central banking authority is to a certain extent in being a bit 'enigmatic' and 'non-predictable' ...i mean on a lighter note. The markets never drove Alan Greenspan; Greenspan drove markets and the economy. The moment we have a Fed which is completely driven by short-term market conditions, we run the risk of monetary policy losing its effectiveness in times of greater crisis.

I for one am not advocating a stubborn monetary policy which ignores market signals. However, at the same time, if risks of inflation and potential stagflation are ignored, we might face tougher situations where monetary policy loses its effectiveness as a economic tool.

The market's moved upwards of 12,500; however we should be seeing heavy volatility in the months to come. Hold on to Financials though, assuming you have a 12 month horizon - we will see interim profit-taking moves though.