(January 5) – “Now that Federal Reserve policy makers have cut their benchmark interest rate sharply and unexpectedly, the question is how much further are they going to go?” asks Jonathan Fuerbringer in today’s New York Times.

“The nation’s central bank can be expected to do whatever it thinks is necessary to keep the economy from heading into what President-elect George W. Bush called a ‘tailspin.’ Remember that to slow runaway growth and head off inflationary forces the Fed raised interest rates much higher than many Wall Street forecasters expected.”

“The problem is nobody knows how low the Fed will have to go to avoid a tailspin, after cutting the target for the federal funds rate by half a percentage point to 6 percent on Wednesday.”

“History shows, though, that investors may be surprised by what the Fed does since the markets rarely guess correctly how high or how low rates will go. Investors will get some guidance today from the government’s unemployment report for December, because it will give the latest indication of how weak the economy is.”

“What’s more, many companies and investors may feel they are in a recession even if the economy technically avoids one, usually defined as two consecutive quarters in which the economy contracts rather than grows. The manufacturing sector is already in a slump. And the sharp slackening in growth that many economists expect — down to just a 1 or 2 percent growth rate from the recent 5 percent pace — is the kind of sharp deceleration that used to leave the economy in a tailspin.”

” ‘In feeling, it will be a recession,’ said James Glassman, senior United States economist at J. P. Morgan Securities. ‘The Fed can’t do much about what is going to happen in the next six months.’ “

“That feeling may help bonds rally, but it is not likely to reassure the stock market, which ended down yesterday, after a euphoric rally on Wednesday when the Fed cut rates.”

“When the Fed was trying to slow the economy with six rate increases in less than a year, it proved to be more resilient than policy makers or Wall Street analysts thought. So the economy may now prove to be much weaker and harder to revive than people assume. If so, the Fed would cut its target rate more than now anticipated, and market rates could fall sharply.”