Rarely have such deep cuts in interest rates prompted so little response from investors and consumers. Less than a year ago, the United States economy responded with apparent scientific precision to crafted shifts in the price of money. Today, the transmission system seems to have seized and normal tools of economic management are not working.
On Tuesday, the US Federal Reserve cuts its key interest rate by half a percentage point, delivering the cheapest money since 1962, but few see a quick turn about. The US economy is sick and the rest of the world is also suffering. The prescribed medicine is failing and a sweat-it-out treatment for the poison of excess consumption and over-investment in the preceding bull market is being imposed by financial markets.
Separating the shock effects of the September 11 terror attacks from the bad economic situation that preceded them is not easy. Economic data for the following period is inconclusive. Yet, with a still firm US-led international coalition and the price of oil stable, there are good reasons to believe that wider damage to the global economy is containable.
It is too early to predict long-run dislocations in the movement of goods, people and, indeed, the entire globalisation process as a result of the attacks. The US is committed to large-scale fiscal pump-priming. It is possible that the combination of easy money and government spending could fuel a stronger than expected recovery next year. Inflation could yet return as the global economic scourge.
In the short term, more immediate concerns are driving markets. Corporate profits will remain under pressure as excess capacity is 'worked out'. For Asia, export demand is likely to remain weak with overseas consumption falling. In recession-prone Hong Kong, the stakes have been raised for Chief Executive Tung Chee-hwa to present a credible response in next Wednesday's Policy Address. However, the real benefits of the cheapest money in 41 years should not be over-looked.