There has been some comment about the Fed now having just 100 bps of rate-cutting firepower left and that when rates are this low then cutting them further will be like pushing on a piece of string, i.e. it will have no real effect in stimulating demand.  Doubters of the Fed’s true firepower would be well advised to re-acquaint themselves with a speech given by Ben Bernanke in November 2002 (well before he became Chairman of the Fed). 

This important speech entitled “Deflation: Making Sure ‘It’ Doesn’t Happen Here”, see  http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm , also effectively kickstarted the Dollar to embark upon a six-year slide (finally reaching a low in mid-2008 before the current Dollar rally began in August when the latest planet-wide mad scramble for Dollars started – which has in turn resulted in the Fed creating currency swap lines with other central banks around the globe).

Essentially Ben highlighted that central banks do not run out of stimulatory firepower once the overnight rate reaches zero.  They can move out along the yield curve, buying 3-month paper and then buying paper of progressively longer maturities in order to force market rates lower (accurately foretelling the Fed’s recent buying of commercial paper).  They can also print currency and distribute it to consumers in order to stimulate spending (adding a ‘use-by date’ to the newly printed currency would encourage consumers to spend it rather than hoard it).  This latter suggestion is what prompted the “Helicopter Ben” tag-line although I always preferred Ben “Gutenberg” Bernanke, but then again I do live in Europe.

It took the Japanese over a decade to get around to “quantitative easing” – don’t expect the Fed to drag its feet if it becomes necessary…