At the time of writing, the US Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England had not yet met - but were generally expected to cut interest rates. Even if the scale of interest rate cuts disappoints some, the money markets point to a prolonged period of low and declining short-term interest rates (see table).

The scale of interest cuts by the Fed has been dramatic this year, bringing interest rates to 2 per cent. While this is still above the virtual zero interest rate environment in Japan, it is difficult to envisage US interest rates falling much lower than current levels.

In Europe, the ECB and Bank of England would seem to have room to reduce rates further, depending on whether inflation weakens. Nevertheless, it seems we have reached a point where the vast bulk of interest rate cuts have already occurred.

Even if central banks were to lower rates further, it is unlikely that the banking system would pass on the full amount to the retail market. At very low interest rates, competition for deposits tends to push deposit rates above official rates, and the need by financial institutions to protect margins tends to limit further reductions in mortgage and other lending rates.

Therefore, the actions to date by the major central banks to ease monetary policy means that any fresh monetary stimulus will be very modest. The majority of economists subscribe to the view that changes in monetary policy take approximately six to nine months before beginning to stimulate the real economy, so it is likely to be the middle of next year before the US economy gets the full impact of the cumulative reductions in interest rates for this cycle.

The current round of US monetary easing began on January 3rd, when the Fed sprung a surprise 1/2 point cut on the markets. Over the course of the first quarter, the Fed funds rate fell from 6 per cent to 5 per cent. During the second quarter, a further 11/4 percentage points were cut, to bring the rate to 3.75 per cent by the end of June.

Therefore, the US economy should be starting to benefit from the earlier stages of this easing cycle. Unfortunately, this does not tie in with the raft of bad news from US economic statistics. Unemployment is rising rapidly and surveys of consumer confidence point to increased pessimism. If consumer confidence continues to weaken and is followed by a poor Christmas for retailers, then recessionary conditions will drag on into 2002.

However, the optimistic view is that, by spring, the impact of the cumulative interest rate cuts will kick in to produce a strong economic rebound. This recovery will be aided by tax cuts creating conditions for a return to boom times by early 2003, according to more optimistic analysts.

As of now there is no way of assessing the veracity of this view, given the uncertainties and time lags associated with monetary policy. There are, however, reasons to be cautious.

Firstly, monetary policy on its own cannot guarantee a recovery. One need only look at the experience of Japan from the early 1990s onwards to see how impotent monetary (and indeed fiscal) policy can be. Japan is now in its fourth recession since 1990, and has run out of policy options. In hand with effectively zero interest rates is a level of public sector debt accounting for approximately 130 per cent of GDP.

Another reason for caution is the seeming inability of the European economy to maintain even moderate economic growth. Whilst Europe (including the UK) should avoid outright recession, the risks of a synchronised global recession in the early part of 2002 are uncomfortably high.

In the face of all this gloom, equity prices have been very resilient in recent weeks. Most markets have regained the ground lost in the aftermath of September 11th.

Even though share prices are still sharply down so far this year, this more recent resilience is impressive. If the optimists are proved right and monetary easing does stimulate a recovery on schedule, then equity markets can probably sustain this rally.

On the other hand, if the economic landscape continues to deteriorate, share prices could well experience a further phase of weakness in coming months.