The Fed's target Fed funds rate reached 2 percent on April 30, which, given the higher inflation rate this year, is lower in real terms than the 1 percent target rate in 2003. The aggressive Fed easing of the Fed funds and discount rates no doubt helped, compared to not doing it, but it didn't help as much as expected. It's innovative use of special auction facilities seemed to be a better, more targeted, alternative.
For those reasons, and the fact that the lower you go the sooner you will have to start back up, my recent position has been that no further cuts in the Fed funds and discount rates are needed. If more Fed stimulus is called for, it can be provided through one of the special facilities.
However, given the recent worsening in the credit freeze and its spread to Europe, I have changed my mind. The European Central Bank has been in denial, in my opinion, even given its single inflation mandate. ECB easing is overdue and a coordinated rate cut with the Fed, the Bank of England, the Bank of Canada and perhaps others participating would likely have a major impact, albeit primarily psychological.
If the Fed initiates a coordinated rate cut of 50 basis points, it will give the ECB cover to do what it should have done already. It would also give the Fed's cut more bang for the buck. After all, given the way things are going in the markets, what do we have to lose?