This abrupt move by the Fed betrays lack of knowledge of stock market psychology. Looking at how stocks are doing today you would not think that anything of interest has happened (no pun intended).
The stock market psychology works on "buy on rumor, sell on news" principle. This is the reason there was a significant rally yesterday, and stocks are in negative territory today.
What the Fed should have done is give signals that they are about to cut interest rates, then give stronger signals, then even stronger signals, then cut interest rate by 0.25% then repeat for the next 0.25%. Markets would have rallied multiple times for each good news signal.
Let me stop you right there - stock market is a multi-agent system with autonomous algorithms making micro decisions, cap managers doing strategic decisions, and everything in the middle. Add a bit of chaos theory. "Buy on rumor, sell on news" is an extremely simplified and naive rational for explaining how a stock market works.
Most theories of how a stock market works have a built-in fallacy. If someone figured out how the stock market fluctuates, it would be ironed out by massive hedges.
There may not be one, precise and predictable way the stock market works, but buying on rumor, and selling on news is a very common, herd mentality that is easily observable, as seen yesterday (rumor) and today (news).
This is assuming that the fundamental trust in the market is still there though the global pandemic. It's hard to heal a deeper pessimism when it settles in, and the coronavirus has caused this, especially in the elderly.
I think the Fed understands stock market psychology pretty well.
The stock market psychology works on "buy on rumor, sell on news" principle. This is the reason there was a significant rally yesterday, and stocks are in negative territory today.
What the Fed should have done is give signals that they are about to cut interest rates, then give stronger signals, then even stronger signals, then cut interest rate by 0.25% then repeat for the next 0.25%. Markets would have rallied multiple times for each good news signal.