The explanation for the faltering stock market's explosive 257-point gain on Wednesday was Federal Reserve Chairman Alan Greenspan's hint in Senate testimony that the Fed may soon lower interest rates.
Markets usually rise when Fed chairmen talk of loweringinterest rates, so that was no surprise. What is new is that after two decades of fighting inflation that was rampant in the 1970s -- which called for a bias toward boosting rates to stop the economy from overheating -- the Fed is shifting its focus to rev up the economy.
The reason? Greenspan is rightfully concerned that the deep recession in Asia and other parts of the world could take the U.S. economy down, too. As recently as mid-August, and despite a frighteningly volatile stock market, Fed officials were still pooh-poohing the impact Asia would have in the U.S.
Their principal concern, they said then, was still the risk that the hard-charging domestic economy would set off new rounds of inflation.
What a difference a month makes. The Fed was slow to catch on (imagine the disaster if it had raised interest rates), but its conversion to the prevailing wisdom that recession is more of a threat than inflation is welcome.
While saying the global financial chaos had not yet caused "significant, underlying weakness" in the overall U.S. economy, Greenspan predicted that fallout from overseas was "likely to intensify" domestically in coming months.
Indeed, lowering short term interest rates -- which also beneficially impact long term rates -- will help global economies recover as well, because not only do the lower rates make the cost of U.S. money less expensive to borrow at home, but also abroad. Europe, which so far has also escaped recession, could help the global economy by lowering its own interest rates.
But for now, economists are keeping their fingers crossed that the Fed governors will make good on Greenspan's "hint" when they meet next Tuesday. To coin a familiar phrase, they need to cut rates sooner rather than later, more rather than less.