Federal Reserve Bank chairman Alan Greenspan is making every possible effort to reassure financial markets and support a smooth reopening of stock markets, says Swiss Re’s chief U.S. economist, Kurt Karl. “The 50 basis point cut should be more than sufficient to provide a calming effect to the markets, though the impact will not be immediate.”

“This large cut in interest rates does not mean that the Fed’s job is done for this economic downturn. With increased market volatility and an uncertain outlook for consumers, the Fed will most likely provide another comforting cut of 25 basis points in interest rates at the next FOMC.” Karl noted that the 50 bps cut from the European Central Bank will not only support an improved growth outlook for Europe, but also help calm the foreign currency and equity markets.

“With last weekÕs attacks likely to have dealt a severe enough body blow to the Canadian and U.S. economies to temporarily send them to the mat, another half percentage point in rate cuts on both sides of the border appears to be a good bet,” say the economists at TD Bank . “This would bring the Canadian and U.S. overnight rates to 3.0% and 2.5%, respectively – a decidedly accommodative stance.”

ItÕs is now fairly obvious, says TD, that the U.S. economy will record little growth, if any at all, in the third quarter of the year, and a contraction in the fourth quarter appears likely. “Still, concerns that a repeat of the 1990-91 recession may be just around the corner are overblown. The Fed has been much more aggressive in cutting rates in the current cycle than it had been in the run-up to the downturn of the early 1990’s, and as a result, monetary policy settings are much more stimulative than they were at that time – which should go a long way to limiting the severity of the current downturn.”

Merrill agrees that manufacturing and cross-border trade will certainly be hurt by the long delays at the border which are impeding cross-border shipments. “The Canadian dollar is likely to trade defensively as global recession risks mount. The futures pit is almost fully priced for another 50 bps out of the Bank by year-end. In our view, this should be considered the minimum that the Bank will do, and probably sooner rather than later.”