The Federal Reserve is now focusing on what Larry Meyer calls "liquidity tools" to make sure the market for short-term credit functions despite concerns about counterparty risk and collateral values. The Federal Reserve hopes that it can handle the current situation without having to ease monetary policy--that its liquidity tools will do enough, and that it won't feel forced to rescue market liquidity by cutting interest rates and thus giving what it fears would be an unhealthy boost to spending. (I think the Federal Reserve is wrong here: the fallout from the current liquidity panic means that a year from now we are likely to wish that the Federal Reserve had given a boost to spending today.)
The New York Federal Reserve Bank has not pegged the averqge funds rate to its 5.25% target, and it now says that it wants to see "trading in the federal funds market at rates close" to 5.25%, not at 5.25%, and the rate has not been at the target for a week. Nevertheless, the target rate has not changed.
My view is that the FOMC is likely to cut the federal funds rate by 25 basis points at its September meeting, but it will do so reluctantly, because markets expect it, not because it believes the situation warrants it.
Of course, if the financial panic-in-embryo starts to affect spending and to slow the real economy, the FOMC will start cutting rates much further and faster.