The municipal market was unchanged to slightly weaker yesterday, as the Federal Open Market Committee cut the federal funds rate target 75 basis points to 2.25%.

"There was a sigh of relief after the announcement," a trader in Los Angeles said. "We got a little initial flurry of trading right away, and then it just kind of went quiet again. Everyone was waiting around on the Fed, and then there were a few initial trades after they did their activity, but that was about it."

"Of course it's a short week, too, and that has something to do with it, and it's Easter vacation also. I know a lot of our institutional sales people are out because of that," the trader added. "It's been a weird day. [Monday] we did a lot of business on the Street, but [yesterday] it was practically nil."

Guy LeBas, fixed-income strategist at Janney Montgomery Scott LLC, wrote in a report that, in yesterday's Fed decision, "the economic factors clearly took a back seat to liquidity fears and the restoration of confidence in a system fraught with uncertainty."

"A prudent, economics-focused Fed would more likely have balanced the downside risks of obviously slowing growth with the potential for higher prices down the road," LeBas wrote. "Such a balance would more likely mean a 50 basis point rate cut, but current circumstances simply demand a more aggressive response."

"A 50 basis point rate cut would have shaken the market's confidence in the Fed, which is already in question, despite a clear commitment to greater liquidity," he wrote. "A full percent rate cut, on the other hand, would have risked further talk of inflation and limited the Fed's flexibility to cut rates further as the future environment will more than likely require."

The FOMC's statement accompanying yesterday's decision was altered considerably from January's statement. At that meeting, the rate was lowered 50 basis points to 3%.

In yesterday's statement, the FOMC expanded the second paragraph to read: "Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters."

However, the new statement's most significant paragraph deals with inflation which, in January, was addressed by saying: "The committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully."

Yesterday, the FOMC wrote: "Inflation has been elevated, and some indicators of inflation expectations have risen. The committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully."

The FOMC voted in favor of this action by an eight-to-two majority. Richard W. Fisher, president of the Federal Reserve Bank of Dallas, and Charles I. Plosser, president of the Federal Reserve Bank of Philadelphia, dissented, favoring less aggressive action.

The Fed also unanimously approved a 75-basis-point drop in the primary credit discount rate yesterday, bringing the discount rate to 2.50%. This follows Sunday's 25-basis-point discount rate cut.

The Treasury market showed losses yesterday. The yield on the benchmark 10-year Treasury note, which opened at 3.31%, finished at 3.46%. The yield on the two-year note was quoted near the end of the session at 1.60%, after opening at 1.34%.

In economic data released yesterday, 1.065 million housing starts were reported in February after a revised 1.071 million in January. Additionally, 978,000 building permits were reported in February after a revised 1.061 million the prior month. Economists polled by IFR Markets had predicted 990,000 housing starts and 1.025 million building permits.

The producer price index rose 0.3% in February, after a 1.0% uptick the previous month. Economists polled by IFR had predicted a 0.4% increase in PPI.

Also, the core PPI climbed 0.5% in February, after a 0.4% gain the prior month. Economists polled by IFR Markets had predicted a 0.2% rise.

In the new-issue market yesterday, Citi priced $441 million of asset-backed revenue bonds for the New York State Tobacco Settlement Financing Corp. Pricing information was not available by press time. The bonds were slated to mature from 2009 through 2012. The credit is rated AA-minus by Standard & Poor's and A-plus by Fitch Ratings.

Some economic data remains ahead in this holiday-shortened week. Tomorrow, initial jobless claims for the week ended March 15, continuing jobless claims for the week ended March 8, and the composite index of leading economic indicators for February will be released.

Economists polled by IFR Markets are predicting 360,000 initial jobless claims, 2.840 million continuing jobless claims, and a 0.3% drop in the LEI.

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