The current scenario is far from being upbeat. In fact, most experts are of the opinion that the U.S. economy will probably slow down further, increasing the unemployment rates and giving rise to what may possibly be the worst recession to hit the nation since World War II. If we go by the conventional definition of 'recession' which means GDP falling consecutively for 2 quarters, it has yet to arrive in the U.S. But the threat of an impending recession is still looming. Obviously, policymakers will not wait for the recession to actually hit the economy before they start taking corrective measures.

One of the things the Fed did was to slash its Federal Funds Rate by 300 basis points, bringing down the interest rate from 5.25 percent in September 2007 to 2.25 percent in March 2008. This was one of the preemptive measures taken by the Fed to ease housing and credit market stress. However, this may not have been enough. There is still panic in the market and in the minds of Americans wih regards to the vulnerability of the economy. It seems that the slump in the U.S. housing market followed by the sub-prime crisis of 2007 is largely to blame for the sharp downturn in the U.S. economy that eventually spread across the globe.

The sub-prime crisis is a clear example of an act done in good faith that has gone badly. Against a backdrop of higher US mortgage rates, home loan defaults and foreclosures hit record levels last year, especially in the sub-prime sector. This sector specializes in offering loans that are categorized as high risk loans to individuals with low income or those with poor credit histories. With major defaults happening in repayment of loans, the sub-prime mortgage sector hit crisis point, which triggered record losses at some of America's largest banks such as Citibank and Bear Stearns. It went on to bring about a global credit squeeze. This was because a large chunk of this sub-prime debt was repackaged into wider debt offerings that were bought by banks and other investors around the world.

The Fed is doing its bit by cutting rates to stem the tumultuous wave of foreclosures bogging down the U.S. housing markets and to prevent the US financial institutions from filing bankruptcies. The rate cuts are based on an optimistic premise that they will make the EMI on housing loans affordable which will eventually help in lowering the number of housing foreclosures. However, the U.S. economy cannot ride high propelled only by sheer optimism. Here's why:

• Firstly, a rate cut won't necessarily help salvage the slumping housing market Since the 10-year Treasury bill and mortgage rates are closely tied to one another a large number of mortgage traders use the 10-year Treasury as a hedging tool in their portfolio. So, the value or yield of the 10-year Treasury is paramount in the mortgage market. If the interest rates are slashed, the traders will be almost forced to sell off their 10-year Treasury as a bond's price and yield are inversely related. At the same time, very few buyers are interested in buying debt instruments at this point as their faith is shaken following the sub-prime crisis. .
• While the Fed can attempt to provide liquidity, the Fed cannot mandate where that liquidity goes, if it does go anywhere at all. Lenders will continue to be highly vigilant and unsure of the solvency of the borrower. Even though the borrower can get a loan at a lower rate, the lender may or may not offer the loan at this rate. In other words, the Fed cannot guarantee that the lender will most certainly offer loan at a low rate.
• Since August 2007, interest rate cuts have been counterproductive. They have discouraged businesses and even consumers to hold back on their upbeat activities. The common sentiment is what if the rates are lower next week or next month than what they are now?
• Then there are questions raised about the effectiveness of this policy. Some believe that the Fed may have been slightly shortsighted in implementing the fed cut rates too soon. Typically, more money pumped into the economy should bring down interest rates and stimulate investment as well as consumption spending. But in this case people probably prefer to hoard money because the future does not seem too bright. Along with the interest rate, the value of money also seems to be going down. From the look of it, the economy seems to be moving towards the ''Keynesian Liquidity Trap'' where most of the people prefer to possess wealth in the form of cash rather than on paper.
• Prices are rising and will continue to rise. Global inflation is feared by traders on the gold ETF among other sectors. Oil prices are reaching record heights, and prices of agro products have been increasing continually since past two years. The Fed correctly anticipated the inflation and now with lower interest, the chances of a major inflation are even greater.
• The U.S. dollar is continuing getting weaker by the day and has been steadily falling against Euro, Yen, and most other currencies. Even though American goods and services have become a little cheaper, the imports are becoming costlier. The U.S. is a leading importer in the world market and with a hefty import bill it will definitely contribute towards inflation.
• As mentioned earlier, the rising oil prices are continuing to plague the global economy. The U.S. consumes 26% of the world's total oil production. With a rise in oil prices, transportation costs skyrocketed and people had less money to spend on other goods. This pushed the economy further downhill.
• Some economists fear that foreign investments will suffer a setback Add to it a Fed rate cut, and it may cause more problems than provide solutions. This is because lower rates may make some U.S. investments, such as government-issued Treasuries, less attractive to foreign investors. In 2007, the U.S. had USD 1 trillion in net foreign investment, most of it into the private bond market, and not in Treasuries. If the influx of that money is further compromised, then it will definitely increase the borrowing costs.

Looking at the above reasons, it seems that the Fed rate cuts may not prove to be a holistic solution after all. Let's try to understand why. Currently, the U.S.GDP is around USD 13 trillion, which is 20% of the global GDP. The U.S. population is 301mn which is 4.4% of the world's total population. Here we see how 4.4% people of the world are consuming more than 25% of world's oil production and 20% of global GDP is dependent on them. If the economy slows down then it will have a significant impact on the global economy.

Now, the Fed did cut rate from 5.25% to 2.25% and still the loss from housing foreclosures increased multifold instead of decreasing, as how it should be if the theory is to be believed. What did not work in the favor of the Fed is the lag effect caused on the economy by the monetary policy. This means that it would take about six to nine months for the effect of a rate cut to filter into economy and to actually kick-start the regeneration process. Due to this drawback, Ben Bernanke, Chairman, The Federal Reserve, urged the legislators to quickly approve the fiscal stimulus package in March 2008, which has since been done. According to him, compared to 2001, the Fed is in a slight fix now because of the technology bubble. So, it is swaying towards expansionary fiscal policy for a more immediate effect. However, the Fed does not have the authority to cut taxes or increase government expenditure by altering the fiscal policy, as this lies within the domain of the U.S. congress.

But, the top priority of both the Fed and the U.S. administration is to fight unemployment, and the efforts are all the more assertive as this is the election year. There has been a staggering increase in the number of Americans who have lost their jobs. The March figures show a rise in unemployment rate to 5.1% in the U.S. after 2005. With no jobs and dwindling income sources, people are forced to cut back on their spending.

Fed rate cuts may help to a certain extent but it will not help avert the imminent recession. The U.S. government has already agreed to introduce a USD 150 billion compromise package to offer temporary tax rebates to low and middle income taxpayers. However, they should consider increasing the transfer payments for the poor and unemployed people as they are not taxpayers and would hardly benefit from this package.