It's not clear if the good vibes from Japan would have a positive effect on Wall Street this week. Indeed, the erosion of investor confidence was one dangerous economic development mentioned by the Fed in a statement explaining its decision. With an estimated 60 percent of Americans' savings in the market, the fear is that Wall Street losses could prompt consumers to hold off on spending, which could turn what's now viewed as an economic slowdown into a full-blown recession. Hence the call to cut rates. Higher interest rates make it more expensive to borrow money for purchases or investments, tending to slow growth.
Lower rates have the opposite effect.
Commercial banks base their prime lending rates on the federal funds rate, so the Fed's rate decisions ripple through the economy. That's why some are blaming the Fed for tightening monetary policy over the past two years. Some analysts say the reason there wasn't a larger cut this month was the mixed economic picture confronting the Fed. Click here to learn more about economic jitters. A raft of data shows a dramatic slowing in the economy and a deeply depressed manufacturing sector.