The U.S. Federal Reserve cut interest rates from 5.25 percent to 4.75 percent Sept. 18. The Federal Funds rate determines the base cost of borrowing money in the United States, affecting — directly or indirectly — everything from mortgage rates to credit card payments. The higher the funds rate, the more expensive it is to borrow and the harder it is for economic activity to percolate, which reins in inflation. Conversely, the lower the rate, the easier it is to get a loan, and the faster the economy grows. Such demand, however, strengthens inflation along with the economy. The Fed's task is ultimately to keep inflation and growth in balance. The Federal Reserve has not cut rates since the months after Sept. 11, when the fear was global recession. A half-point cut is not a minor action, but instead a serious step the Fed does not undertake lightly, particularly as signs of strengthening inflation — whether they be import prices or higher energy costs — are becoming more prevalent. Such a sharp rate cut indicates that the Fed fears that either the United States is flirting with recession or it is already entering one, and the best way to turn the system around is to reduce the cost of capital. This does not have to do with the recent spate of news regarding subprime mortgages. Assuming for the moment that the total pool of endangered subprime assets is $1.5 trillion and assuming a 20 percent foreclosure rate (which would be a historical record), then "only" about $300 billion in assets is in danger. Furthermore, considering that even foreclosed homes very rarely sell for less than half of their value, the total amount of assets in question comes out to just more than 1 percent of gross domestic product (GDP). When all was said and done, the United States' last significant financial crisis — the savings and loans debacle — cost "only" about 3 percent of GDP. Aside from those unfortunate souls who have to foreclose, the bulk of the pain will be felt by those who attempted to leverage other assets to profit from trading these mortgages — which are normally considered rock-solid investments — on the secondary market. The Federal Reserve is rarely concerned with the welfare of those who make their living trading the assets of others. It is, however, obsessed with the nature of the "real" economy, in which the subprime crisis has played a supporting role. In 2005 and 2006 irresponsible subprime lending fueled a hefty chunk of activity in the housing industry, so now as financial institutions reassess risk and tighten lending criteria, the housing industry is seeing sharp drops in demand. Add in slower growth in Europe and a stalling of growth in Japan, and the Federal Reserve under Ben Bernanke decided on a sharp interest rate cut to compensate.