It has been thought that there was no chance the Fed would move rates, but the upsurge in volatility now has analysts suggesting a cut of 0.25% to 1.75% for the Federal Funds Rate might happen, just to take some pressure off the markets. It could be half a per cent, according to some economists.

US Government bond yields plunged yesterday as investors fled share and commodity markets to the safety of US Government debt: the two year bond yield finished at 1.73% and the 10 year bond at 3.39%.

The Fed pumped in $US70 billion into the Us financial system to maintain liquidity after a shortage of money cash rates soared above 6%, compared to the Federal Funds Rate (like our cash rate here) of 2%. The shortage and nervy trading forced the Fed to make two injections during the day to different parts of the system. The cash rate then plunged to a low of 1.75%, according to reports on Bloomberg and Reuters.

The Fed’s move was after the European Central bank auctioned $US43 billion of one day money and the Bank of England around $US8 billion in short term money. Earlier the Reserve Bank had injected $1.3 billion into the local market.

The injection by the Fed was the biggest since September 11, just as the 505 point drop on the Dow and the 4.7% fall in the Standard & Poor’s 500 was the biggest since that terrible time.

Gold was up $US23 an ounce to around $US788 an ounce, and oil was the silver lining on a tough day (if that’s possible). Oil plunged over 5% as investors quit that market for the safety of cash.

Oil fell under $US95 a barrel, rose a touch, then eased to close around that price in New York while the Australian dollar had a similar experience, but ended around 80 US cents.

Now the Fed meets tonight in a scheduled discussion of rates by its Open Market Committee, the key rate moving body.

It will be a sober, well briefed affair, given the Fed’s central involvement with the events of the weekend at Lehman’s collapse with $US 613 billion in debts, the largest ever bankruptcy filing seen in the US.

Merrill Lynch US economist David Rosenberg, who says he expects the Fed to cut its fed funds target to 1.5% from 2% Tuesday.

Inflation is falling: the producer Price Index dropped 0.9% last month in a larger than expected fall and the consumer price index tonight is expected to show a small fall; US retail sales fell 0.3% last month, compared to a revised fall of 0.5% in July (originally it was a drop of just 0.1%). That points to a sharper than expected contraction in consumer spending.

US business inventories soared 1.4% in July, almost three times the expected 0.5% a real sign of stagnating demand from consumers. While this will help boost growth this quarter, offsetting the slump in consumer spending, the sharp rise in stocks means a fall in output can be expected in coming months and further downward pressure on employment.

Employment will be boosted from the thousands of jobs to be lost at Lehman Brothers, Merrill Lynch and other financial firms still downsizing, and yesterday HP, the technology giant, revealed it was planning to cut 24,600 jobs over the next year, with half of those losses coming in the US as it merges the EDS data processing business it acquired last month.