Without advance warning or tips to friendly media, the second most senior man in the US Fed, Vice chairman Donald Kohn, has confessed that he and the Fed had not anticipated “the degree of deterioration that has happened over the last couple of weeks” in financial markets.

“Uncertainties about the economic outlook are unusually high right now, “Mr Kohn told the Council on Foreign Relations in New York. “These uncertainties require flexible and pragmatic policy-making — nimble is the adjective I used a few weeks ago.”

The speech was all about the current problems in financial markets and their likely impact on the US (and global) economy. They were not a few passing words; it was a full-on on central banker speech, direct and designed to send home the message that the problem is getting worse, quickly: “we were taken by surprise, and we are going to adjust, quickly.”

So it was probably not a surprise that those and similar comments set off a rally in US stocks which saw the Dow finish 331 points, or 2.5%, higher. It was the second day of strong gains, the biggest in four years. The market had jumped more than 230 points on Tuesday after the $US7.5 billion temporary bail out of America’s biggest bank, Citigroup, by Abu Dhabi’s wealth fund. 

While the bulls were cheering and celebrating what they saw as the certainty of a rate cut on December 11 by the Fed at its last meeting for the year, it was more of a relief rally than a recovery, just as the rebound after the Citigroup rescue was one of ‘phew’.