The decision of the Federal Reserve Board to reduce interest rates for the 13th time since 2001 reflects its continuing concern about the outlook for the US economy.
It is also a move designed to lessen the risk of the world's biggest economy slipping into a period of deflation - or generally falling prices. Despite some signs of recovery, the Fed judges that this is still a risk which is worth guarding against.
The Fed's calculation is that the potential economic costs of getting out of a deflationary slump are so large that it is essential that it sends a signal that US interest rates are going lower, and are going to stay down for a prolonged period. Hence its decision, announced yesterday, to reduce its key interest rate by 0.25 of a percentage point to 1 per cent and - crucially - its indications that it is willing to cut rates further, if this is required.
The US central bank may be concerned that, by cutting interest rates to so low a level, it is risking a longer-term pick-up in inflation more pronounced than it would wish. However, its key policy-making committee reckons that this risk is worth taking, to lessen the danger of deflation. The risks of a slump into deflation still outweigh the chance of an inflationary pick-up, it says, and the US economy has still to show clear signs of recovery.
Only time will tell whether the Fed has taken the correct course of action. However, the motivation for its move is clear and, while the decision to reduce by 0.25 of a point rather than a full half-point will be debated in the markets, the Fed has left room for a further reduction if the expected second-half recovery does not appear. Also interest rates, at 1 per cent, are at their lowest level since 1958, meaning that the Fed is taking an aggresive approach in trying to kick-start the economy.
It is an unashamedly pro-growth policy and stands in contrast with the overly-cautious interest rate reductions by the European Central Bank. Germany, the euro zone's biggest economy, faces a much greater threat of deflation than the US, yet base euro zone interest rates now stand a full percentage point above their US equivalent.
So will the Fed's medicine work? The outlook for the US economy - which has been the engine of growth for the world in recent years - remains uncertain. Recent indicators have given cause for optimism, but concerns remain, particularly about the level of indebtedness of consumers and business and the large deficit on the current account of the balance of payments. These are legacies of the boom years which could inhibit growth.
The combination of lower interest rates, a weaker US dollar and tax reductions should add some stimulus in the months ahead. The success of this policy push for growth is vital from an Irish viewpoint. Our small open economy relies on international buoyancy and - with little growth likely from the euro zone - a US-led recovery is the best hope for a pick-up in the months ahead. However, despite the Fed's action, such a recovery can still not be guaranteed.