Discolsure: I will probably be the lone voter for the cut. I absolutely believe it would be unwise if the Fed took that path, but I think that's what they're going to do anyway. If things get real ugly before the elections, you can count on a lot of incumbants losing their seats. So the Fed is going to have a lot of pressure to prop up the market at any and all costs at least until after election day. The average American is too stupid to understand economics, so any rise in crude oil prices as a result of lose monetary policy is just being blamed on speculators anyway. What an ingenious red herring!
We are in an election year, the fed will sneak around raising rates until it is forced to. I would look for them to bend some more rules, we are going to see another new acronym.
If the S&P breaks 1250 and then plummets to new lows, say 1100 or lower, they may well blink and do another 1/4 point cut at the height of the panic. If that happens, it could be a multi-decade high in bond prices. Short the crap out of the 10 and 30 year, and back month Eurodollars. And JGBs for good measure.
It takes guts to raise rates, Bernake has no guts. Fisher would restore the much need credibility. To hell with the stock market, raise rates now!
Looks like the Fed is fucked. A) Do you hike and save the dollar and send every bank and homeowner into bankruptcy B) Do you cut and kill the dollar sending oil so high it kills the economy C) Do you do nothing and watch the collapse of worldwide financial systems send us into a new Great Depression D) Or Do you create a new term lending facility and exchange every real asset the fed has for subprime paper and accomplish all of the above.