Last Thursday, the Fed moved rates down by a quarter of a per cent. It was the Fed's first cut in rates for three years.
Central bankers are a sober lot. Yet it was as if this most austere set of individuals had lit a blue touchpaper. Markets around the world ignited.
After a surge on Wall Street, the effects were felt first across the Pacific. After the Bank of Japan followed suit with a similar easing of monetary policy, the Japanese stock market caught fire, 6 per cent. The torch was then passed on to London where the UK stock market had its best session since Britain left the ERM nearly three years ago.
Yet there is a familiar irony to all this. In the perverse world of financial markets, good news is bad news and vice versa. The markets are celebrating the possible turning point in the world interest rate cycle. But this is only happening because the global economy is slowing at an alarming rate.
At the beginning of this year, it all seemed very different. Both the US and UK grew at about 4 per cent in 1994. Some deceleration was expected, but Europe was on course to pick up the baton. And Japan was confidently expected to swing into full recovery with the Organisation for Economic Co-operation and Development forecasting 2.5 per cent growth this year.
Both the Fed and the Bank of England took further steps in February to restrain economies that appeared to be growing at unsustainable rates. The Bank raised interest rates to 6.75 per cent, but the City's money markets were expecting them to go a lot higher.
But then the outlook started to darken. Early confidence that the US was set for a "soft landing" began to ebb away. Talk turned to a "bumpy landing". By the end of last month, the Chairman of the US Fed, Alan Greenspan, was conceding the increased risk of "a modest recession" in the immediate future.
But at least the US has had three years of solid growth behind it. By contrast, Japan has been bumping along the bottom of its most protracted post-war recession. 1995 was the year in which recovery was supposed to occur.
Then came the appreciation of the yen, up by more than 15 per cent against the dollar since the start of the year. The squeeze this has put on Japanese industry has dashed those early hopes of recovery. With banks weighed down by bad debts estimated at pounds 300bn, the fear has been that the Japanese economy could spiral downwards into a deflationary tailspin not seen since the 1930s.
The stock market has reflected these fears. First it took Nick Leeson and Barings with it. Then as it fell further, touching a 34-month low on Monday, the danger was that it could take the beleaguered Japanese financial system with it, given the stake banks and life assurance companies have in shares. Even after yesterday's extraordinary rise in the stock market, the Nikkei 225 index was still 18 per cent down on the start of the year.
That surge in the stock market will be a one-day wonder unless the Japanese government does what it has failed to do so far this year - come up with a rescue package for banks and a wider stimulus for the economy that measures up to the scale of the problem. The encouraging sign is that they may now be about to do that.
But for Britain, a greater concern has been the flagging growth prospects of continental Europe, particularly since the recovery has been driven by exports. The barometer has turned from fair to changeable with remarkable speed. European economies emerged from recession later than Britain, so the recovery was expected to gather pace. Instead, it has lost momentum, principally because of the effects of the strong mark in squeezing German businesses.
The sparkling performance of stock markets is thus testament to the sound of the world economy shifting down a gear. It is a mixed blessing for Britain. A slowdown in world activity is bound to affect growth prospects. Yet the outlook for interest rates is much more favourable. At the worst, interest rates might have to rise a further percentage point. But there are plenty of analysts who believe they have peaked.Reuse content