The deceleration of the investment-led expansion is sharper than ever before. Capital spending shows little sign of recovering in the face of shrinking profits and nervous lenders looking for safe havens for their money. Add to this the residual effects on consumer spending caused by higher interest rates imposed by the Federal Reserve last year, higher energy prices, and consumers maxed out on durables and personal credit, and you have the prospect of a double whammy that might extend the decline in sales and earnings throughout the year. Only the Federal Reserve can provide a parachute. The risk of a longer and deeper slump than previously anticipated requires a bigger, and swifter, cut in interest rates.
Speed is critical.
The recent Japanese experience is a vivid example of how even minimal rates don't restore momentum once confidence is shattered. Forget the Bush tax cut. The stock market has already discounted a reduction of one half of 1 percentage point in anticipation of the March 20 meeting of the Fed. More will be needed if we are to avoid an environment of fear in which anything can happen, most of it bad. The Fed has had a good spell for a number of years, but rates are still too high.