Fighting the Psychology of Reduced Expectations
Over the past week-and-a-half, stock markets have made it clear that the prevailing psychology about the economic future for the United States and the tag-along world has taken a turn for the worse. Such a downshift in confidence can be self-fulfilling and, at the very least, is an impediment to the goal of maintaining normal business operations until the problems in the financial sector begin to dissipate.

Today, central bankers around the world − the Federal Reserve, the European Central Bank, the Bank of England, the Bank of Canada and several others− took unprecedented and coordinated action to fight this torpor by cutting interest rates by 50 basis points. This is one more step in a series of shock treatments that is being applied to the financial sector to unblock the credit squeeze that is threatening the global economy.

In the United States, the federal funds rate has been lowered to 1.50%. In Canada, the target overnight rate now stands at a quite low 2.50%. The recent downshift in commodity prices has given the banks on opportunity to put any concerns about inflation aside for the moment while they address the more immediate problem of weakening prospects for jobs, incomes, profits and investment.

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