Disaster averted?

What happened

Stocks rebounded worldwide on Tuesday after the Federal Reserve cut interest rates to give a boost to the sagging economy. Fed policy makers were scheduled to meet next week, but decided to act immediately in an emergency conference call held as global stocks plummeted on fear of a recession in the U.S. (AP in Yahoo! Finance)

What the commentators said

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Sweet relief, said The Boston Globe in an editorial (free registration). With its “surprise decision” to slash rates by “an unusually large three-quarters of a point,” the Fed “threw all its weight on the side of preventing a worldwide financial panic.” The immediate about-face by stock markets the world over proved the “aggressive move” was in order.

It is indeed “bad news when markets panic,” said Willem Buiter in the Financial Times’ Maverecon blog. But “it is worse news when one of the world's key monetary policy making institutions panics.” The Fed’s “disproportionate” reaction “smells of fear,” and will only convince even more investors that “the sky is falling.” Ben Bernanke and his crew are now “part of the problem.”

The Fed might have had more credibility if it had coordinated this drastic move with central bankers in Europe, said The Wall Street Journal in an editorial. By acting alone, Bernanke and company risked a “further reduction in the dollar's value against the euro,” and the “trade tensions” that would go along with it. “The larger risk is that these rate cuts will contribute to a further flight from the dollar, along with more inflation down the road.”

Granted, “it’s too early to put the antacids away,” said The New York Times in an editorial (free registration). But the surprise rate cut did show that government can act decisively when it has to. The next step is for Congress to pass a stimulus package that makes sense, but even then there’s “no guarantee that it will be enough to pull the economy out of the hole.”

Chopping rates may appear “a bit screwy,” said Steven Pearlstein in The Washington Post (free registration). After all, too much cheap credit got us into this mess by fueling the real estate bubble. But “the Fed’s big fear isn’t a mild recession. It’s a market meltdown,” so stemming panic and making the “correction process” proceed more slowly now that the bubble has burst is probably the one of the “less bad options” out there.