The Federal Reserve cut short-term interest rates by 0.25% today. This marks the third time in a row that the Fed cut interest rates. Short-term rates are now at 4.25%. The Fed also lowered the discount rate it charges banks for direct loans by 25 basis points to 4.75%.

While analysts were expecting a 25 basis-point cut, investors were hoping for more. The Dow sold off 294.26 points to close at 13,432.77. The NASDAQ ended 66.60 lower at 2352.35.

In their statement, Fed officials hinted that more cuts are possible if the housing and credit crisis (which stems from mortgage lending) doesn't improve.

That's very encouraging news. You'll remember November was a particularly rocky month for the market because the Fed had said they didn't expect any more rate cuts this year. But continued fallout in the financial sector and growing fears of a recession have given the central bank a change of heart.

While I was hoping myself to see a 0.50% cut today, I'll definitely take the 0.25% we got. And I'm confident we'll see several more rate cuts are coming in 2008.

Why am I so sure? Not too long ago, the Fed significantly reduced its growth forecast for 2008, lowered its inflation forecast and raised its unemployment forecast. Specifically, the Fed now expects 2008 GDP growth to range between 1.8% and 2.5%, which is down from its previous forecast of 2.5% to 2.75%. All this means is that the Fed is setting itself up with a series of reasons to continue cutting interest rates next year.

Plus, the Fed's inflationary forecast for the core Personal Consumption Expenditure (PCE) index was also lowered to between 1.7% and 1.9% from its previous level between 1.75% and 2%. That's essentially an admission that core inflation is well within the Fed's "comfort zone" and that it can continue to cut interest rates.

Even at its new level of 4.25%, the Fed Funds rate remains significantly above market interest rates based on the three-month T-bill rate of 2.87%. The Fed simply cannot fight market rates for too long, so more rate cuts are definitely in the cards.

And last but certainly not least, we should remember that the Fed is the lender of last resort. It still has a lot of work to do to fix the credit crisis. Speaking of the credit crisis, banks, money managers, Treasury Secretary Paulson and the White House are all taking steps to resolve these problems. In my new January Blue Chip Growth issue, I explain all of this and more in detail, and why I believe we'll be seeing significantly lower rates in 2008. The issue will be out on Monday, but I'll give my readers a sneak peek of my buy list on Saturday.