The Fed slashed the Fed funds rate by .75%. They announced at 8:20 AM ET this morning that were making an emergency rate cut. It is the largest cut since 1984! And yet the futures markets are still indicating that traders want at least another .50% mark down at the Fed meeting next week. Most agree that the Fed is “behind the curve,” and Bernanke himself acknowledged last week that it takes at least 12 months for the effects of rate cuts to be felt. Traders are probably remembering those comments as well as noting that it shows a major lack of confidence by the Fed for the markets to correct themselves.

There is not much to talk about in this holiday-shortened week as far as economic data goes, but that doesn’t mean it is going to be a boring week. The stock market closed at a 9-month low on Friday. This morning the Dow has now hit a new one-year low, and the S&P 500 index is off to its worst start to the year on record. Heavy selling generally creates a snowball effect, which means that the downward momentum in the stock market may actually pick up speed. The housing slowdown is already the worst seen since the Great Depression, and now the stock market is taking on a similar tone. We already expected extreme volatility this week, but at this point it could almost be classified as scary volatility.

Foreign markets are being hurt even more than U.S. markets. Asian indexes fell anywhere from 5 to 12 percent last night. European indexes dropped 4 or 5 percent. A U.S. recession may very well lead to a global recession. Economic strength in other countries is primarily fueled by exports, much of which goes to the U.S.

And, if President Bush’s pleas were not enough to get OPEC to bring oil prices down, global economic weakness might do the trick. Demand is undoubtedly going to slip, and OPEC may need to drop prices significantly if they want to maintain a steady flow of income. Don’t be surprised if oil prices dip back to $80 per barrel with haste.

It’s somewhat ironic that mortgage-backed securities are going to benefit from a problem that started with mortgage defaults. We have switched to the FNMA 30-year 5.5% because mortgage rates have plunged. It is currently up 37bp at 101.75.

When the 10-year Treasury yield was up above 5.00% back in July, we predicted that it would fall to the mid to high 3.00% range. Now with the yield dipping to 3.52% this morning, we foresee 3.00% as a very real target. As long as stocks keep sinking, support levels and overbought conditions are irrelevant. Investors will need to stash their money somewhere safe where they can earn more than in a money market account.