The Federal Reserve Board must be deeply concerned about the state of the US economy. There is no other explanation for its decision to reduce interest rates again yesterday by half a percentage point, the fourth such cut this year. Normally the Fed announces rate reductions after the monthly meetings of its policy-making committee; however two of this year's cuts have come between meetings, further evidence of the extent of the Fed's anxiety.
The Fed's latest move should help to support growth, but it is important to realise that its chairman, Mr Alan Greenspan, does not have the power to single-handedly revive the US economy. Share prices reacted positively to the move, but the mood of the markets could easily be swung the other way by some other piece of news in the days ahead. The continuing stream of rationalisation announcements by major US multinationals is clear evidence of the difficulties facing the world's biggest economy.
The poor state of US manufacturing industry spurred yesterday's Fed move. Investment is falling sharply and, together with poor consumer confidence, this "threatens to keep the pace of economic activity unacceptably weak," according to a statement from the US central bank. The Fed has now cut US interest rates by a cumulative 2 percentage points this year, bringing the key Fed funds rate to 4.5 per cent, its lowest level since May 1994.
The Fed's action is certainly decisive. It is desperately trying to restore business and consumer confidence. The danger is that falling investment triggers job reductions and declining consumer demand, in a self-perpetuating downward spiral. This risk is increased by the impact of the sharp fall in US share values in recent months on both investors' wealth and the financial health of industry.
Lower interest rates will take some time to feed through to consumers and business, through falling loan repayments. But the Fed's immediate target will be to shore up confidence. This may work. But while Mr Greenspan is often credited by commentators as being the architect of the US boom of recent years, the power of central banks to influence economic activity is often overstated. Despite lower interest rates, the danger of a US recession remains.
The Fed's move is welcome from the Irish viewpoint. The economy here is very vulnerable to US trends; lower interest rates will help some of the major US companies investing here, particularly if they support consumer demand. However the period of retrenchment of the major technology companies still has some way to run, even if the US economy starts to recover shortly. Lower US interest rates may also hasten a rate cut by the European Central Bank. The dramatic reductions by the Fed will put the ECB under pressure to cut sooner rather than later and help to support the international economic outlook. But for the moment all eyes will be on the reaction in the US to the Fed move and the assessment of whether it is enough to see off a nasty recession. It is too early to say with complete confidence that it will, but it does lower the risk of a prolonged downturn.