ECONOMIC CRISIS

THE FED cut interest rates dramatically at its September 18 meeting, reducing the benchmark rate that governs short-term lending between financial institutions, by 50 basis points, or half a percent. The banks then cut their prime rate for commercial loans by an equal amount. This was twice the 25-basis-point cut that was expected from the Fed.

Immediately, the stock market had its best single day in nearly five years, and stockbrokers and the media were suddenly assuring us that now that the Fed had acted, there was little possibility of recession.

But a more serious analysis reveals a different picture: first, the rate cut proves that the threat of a recession accelerated by the bursting of the housing bubble is real enough for the Fed to try to mitigate its effect; second, the economic situation has deteriorated quicker and more deeply than was expected, meaning that recession is closer to becoming a reality; and third, the various actions the Fed had taken to this point (pumping cash into the banking system and cutting its discount rate) failed to stop the downward slide, so stronger measures were necessary to prevent the crisis in the credit markets from overwhelming the real economy.