No quick cure for what ails U.S., global economies

By Emily Kaiser - Analysis

WASHINGTON (Reuters) - There is no quick cure for what ails the U.S. and global economies, but if the Federal Reserve's emergency interest rate cut on Tuesday can instill some confidence among consumers, companies and investors, it may speed a recovery.

Interest rate reductions take time to work, and they cannot undo the damage inflicted by the tumbling U.S. housing market and subsequent credit contraction that has curbed the flow of cash to households and businesses, pushing the U.S. economy to the brink of a recession.

For volatile world financial markets, the best hope is that the Fed's efforts, coupled with a $150 billion fiscal stimulus plan that President George W. Bush is planning, can coax cautious consumers and companies back to normalcy and shorten any U.S. downturn, limiting the strain on the global economy.

Rate cuts and stimulus "won't avert a recession but will probably make it a much milder recession than it otherwise might have been," said Nariman Behravesh, chief economist at Global Insight in Lexington, Massachusetts.

"There's a huge (market) confidence factor at play. The worry is that it spills over to consumers and businesses. That is what the Fed and the president are trying to avoid. They don't want consumers to suddenly stop spending. They don't want businesses to retreat back into their shells."

In cutting the benchmark fed funds rate by three-quarters of a percentage point to 3.5 percent on Tuesday -- the biggest drop in the overnight interbank lending rate in more than 23 years -- the Fed highlighted its concern that credit conditions have tightened for households and businesses.

That is what is shaking the U.S. economic foundation and raising the specter of a recession. Consumer spending accounts for about 70 percent of U.S. economic activity, while companies hold the key to the all-important job market.

When those pillars fall, the U.S. economy invariable tanks, taking much of the world down with it. Both pillars have begun to wobble, as evidenced by a drop in December retail sales and a surprisingly weak employment report, and no amount of rate cuts can instantly steady them.