Are we going into a recession? I was asked that question over and over again at last week's AAII Investor's Conference. On several occasions, I have said that when the Fed lowers interest rates, it's already too late to prevent a recession. Will I be right?

As I recall, the Fed has managed to have a "soft landing" only twice in the last ten economic downturns. The most recent instance was in 1995, when Dr. Greenspan managed that remarkable feat. It was the only one he had in 20 years in office, so the chances of Dr. Bernanke wiggling his way to a soft landing so soon in his career has to be pretty slim. In fact, it has been my observation that the Fed tends to raise interest rates too high and cause recessions, not prevent them.

In my essay of April 13, 2006, I said that it would be a problem if the Fed Funds rate went above 5%. Indeed, the Fed raised it to 5.00% a month later; then increased it again to 5.25% in June. This was done even though Dr. Bernanke had previously told Congress in April that the Fed might pause in its series of rate hikes to await further data. In my view, the move to 5.25% was unnecessary and was the classic step too far.

Now the Fed is in the process of lowering the Fed Funds rate. They lowered it to 4.75% on September 18th and again to 4.5% on October 31st. The first move sent stock prices flying, while the second did not because the Fed said it felt that the risks of inflation and the downside risks of a slower economy were roughly in balance. This statement signaled that there probably wouldn't be any further rate cuts soon. Disappointed, investors sent stock prices lower and we got a C/Dn signal the next day, November 1st.

So where are we now? Recession talk has been increasing lately and I read more and more about it each day. But there are some who say a recession is not likely. Mr. David Joy of Riversource Investments appeared on Bloomberg this morning and said that Wall Street talk of a recession is overblown. He said the housing market affects only 4.3% of the economy so its problems aren't big enough to sink the economy all alone. He did admit, however, that credit constraints could cause a recession. On the other hand, Mr. James C. Cooper, BusinessWeek Senior Editor, writes in the November 10, 2007 edition that the economy has "Tipped Toward Recession," and he explains why in very clear terms. I have read his articles for many years now and he knows what he's talking about.

So is it too late for the Fed to prevent a recession? Truth be known, we will know if it's too late only when It's Too Late.