Donald Kohn, the vice-chairman of the Federal Reserve, made news today by saying that the Fed "should not hold the economy hostage" to teach a lesson to financial market speculators. I think this is a clear signal that the Fed is leaning towards lowering rates at its December meeting.

Kohn appeared to be defending the Fed against critics who argued that the Fed's rate cuts may ease the pain for some investors and speculators who took on too much risk and suggest the Fed is bailing out these investors.

"To be sure, lowering interest rates to keep the economy on an even keel when adverse financial market developments occur will reduce the penalty incurred by some people who exercised poor judgment," Kohn said.

"But these people are still bearing the costs of their decisions and we should not hold the economy hostage to teach a small segment of the population a lesson."

The Fed cut is federal funds rate October 31 a quarter-point to 4.5 percent following a half-point cut in September in an effort to ease stress in housing and markets and minimize the economic impact of the credit squeeze.