The message has gotten out, the U.S. economy is weakening and fast. A few months ago financial junkies were talking all about it, but just in the last few weeks the economy has caught the full attention of main street and all the major media outlets. 
First the big news last week was the economic stimulus package proposed by President Bush. The President wants to provide $140 to $150 billion in economic stimulus to taxpayers. The hope is that by giving back to taxpayers, taxpayers will respond by spending that money and in turn helping the economy.
Today the Federal Reserve announced a 75 basis point cut in the federal funds and discount rates just one week before they were expected to meet to discuss the future of interest rates. You can read the full text of the statement here. In the statement the committee noted the softening in the labor market, which I have harped on of late, as a source of concern.
The question everyone has though "Are the stimulus and fed rate cuts enough to save the economy and the market?"
I certainly don't have the answers to the question of precisely how the economy or the market will act, but I have a few thoughts about what could occur.
I believe the stimulus package is more about keeping the spirits of the American consumer up than it is being a viable way to stop a recession. Most analysts believe that even the $1.4 billion plan falls far short of what would be necessary to avert a recession. The rebates could be important for the psyche of the consumer though.
The Fed rate cuts are much more important in the grand scheme of things. It is likely that the Fed had fallen behind the curve before today, but a 75 basis point move is a huge move and is a good start. I would expect the Fed to move again next week, though whether it will be 25 or 50 more basis points is unclear. The financial sector is aided greatly by rate cuts, and since the financial sector has been at the heart of this recent downturn, it is much needed.
I believe that at this point, the most likely outcome is a small and somewhat short-lived recession. The definition of a recession is two consecutive quarters of GDP contraction, which I believe is fairly likely. I do think that those who are saying we are setting ourselves up for another depression like that of the Hoover days are far overshooting this crisis.
The stock markets have been trading down consistently and significantly in the first several trading sessions of the year, primarily because of this economic recession fear. The thing that investors should remember though is that markets often hit bottom before the economy does, because the market predicts the future and discounts recessions ahead of time. The million dollar question will be exactly when the market is done pricing in the recession if it does indeed come.
I think that the Fed rate cut and the stimulus package are both positive steps, but more needs to be done to help the economy going forward.
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