"The fallout from the U.S. subprime crisis continues to inflict damage, the ensuing rout in the marketplace has been frightening, and there is growing concern over whether the crisis will widen and threaten the entire U.S. banking system's stability," said Zhao of Bank Credit Analyst. The Fed historically acts quickly to ease policy whenever the banking system's ability is threatened," said Zhao. The magnitude and scope of the ongoing subprime crisis is "serious," but Zhao said it is "not enough to jeopardize the stability of deposit-taking institutions, nor dire enough to cause a full-blown credit crunch."
Your prediction of a rate cut seems to have some support, and I, for one won't be surprised to see the Fed follow their precedence of kicking the can down the road perhaps in hopes of heavenly intervention, but while the cut might inject some hope to the market, the effect would be minimal and fleeting at best. As you correctly observed mortgage rates are already climbing not due to the cost of money which the Fed can only minimally effect, but rather due to the increased perceived risk of loaning money into a falling asset market. It is obvious to most attentive observers that unlike an equity crash, a housing bubble collapse continues for months, even years, after the peak and a Fed resetting of 25 pts. downward will be easily overwhelmed by a 300 pt. upward resetting ARM. And after all, these are mortgages that the borrower couldn't afford to repay in the first place! I find it difficult to believe that any home mortgage issued today might not be underwater a year or two from now, and that is the problem in the housing market today, home prices still inflated by speculation.
IMO while a Fed cut will have no lasting impact upon business activity as evidence of a rolling over economy into recession continues to accumulate with today's job report, the attractiveness of U.S. assets will come into serious question by foreign investors. Should the numbers of investors fleeing the U.S. markets accelerate, the dollar's death spiral will begin. All else is just noise.