The Fed's 75 basis point cut in the funds rate a week before a regular policy meeting is extremely unusual. If it had been 50, it wouldn't have been quite so surprising - but 75 runs the risk of conveying panic more than reassurance. The U.S. stock market is now trying to find its footing, though the rest of the world had a seizure while our markets were closed yesterday. Watching that, I though - so much for decoupling. The notion that the rest of the world could carry on while the U.S. had a financial panic and a possible recession always seemed a little dreamy, and now it looks like perceptions are catching up with that reality.
So far there's nothing in "real" sector indicators to suggest that the U.S. economy is falling apart; unless they know something we don't, the Fed's action is a prophylactic against the financial turmoil turning into a deep recession. I suspect the U.S. economy is already in, or very close to, recession right now. But no one - and certainly not all those people predicting the worst downturn since the 1930s - can really say how bad it will be. My guess right now is that it's less a matter of the business cycle than a longer-term structural issue, which could mean several years of close-to-zero growth in the U.S.
Doug