A curious thing happened in 2001. The Federal Reserve reduced the federal funds rate 11 times. The rate paid by banks to borrow funds overnight fell from 6.5 percent at the start of January to 1.5 percent at the end of December -- a level not seen in decades.

The purpose of the reductions was to stave off recession or at least prevent a worse recession than would otherwise be the case. That's the theory, anyway. Whether the Fed's reductions work or not is unclear because no one can prove what might have been.

But there's another result from the Fed reductions, a consequence which needs to be reviewed with some care. Having lowered the federal funds rate 11 times, the power of the Fed has now been now substantially eroded.

To see why the Fed has less clout, ask this question: If the recession deepens, can the Fed again lower rates? The answer is plainly yes, but the impact differs. There is just so far you can lower rates before they become uninteresting.

You can see how this has happened in Japan. If you need cheap money, Japan is the place to go. On September 19th, says the Japan Information Network, the Bank of Japan reduced the official discount rate to .1 percent.

The Japanese discount rate is absurdly low because the country is awash in savings. Rather then spend and max out credit cards, consumers carefully put away their money. If you need a loan to expand a factory or buy inventory, Japan has it.

But few Japanese companies are expanding. Why produce more if consumers won't buy? Why hire more people?

This has not been a short-term problem for Japan. The Nikkei topped out at 38,915 on December 29, 1989. This week it has been below 10,000, according to NikkeiNet.

We may be coming to an unusual point with the U.S. economy, a moment when lowering the federal funds rate just doesn't matter. If you won't hire more people and expand production at today's rates, will lopping off another .25 percent off short-term interest rates change your mind?

The current recession has produced both low interest rates and sizzling home sales. The National Association of Realtors says existing home sales reached a record 5.25 million units last year. The National Association of Home Builders also reports a record: 900,000 units in 2001, up from 877,000 units in 2000.

Despite the recession, bankruptcies, and unemployment it would not be a surprise to see home sales hit record or near record levels in 2002. After all, what else are people going to do with their money? Cocooning is in, traveling to distant shores is out. Do you want to put more money in an IRA, or a downpayment?

For several years people have been talking about the "new economy," an environment where the Internet, telecommunication firms, and bio-tech labs will lead us to a wondrous world of productivity, riches, and health. There is some truth to such notions, but whether the economy is new or old it remains dependent on consumer spending -- and the biggest consumer item of all is a home.

The particular circumstances of this recession favor homebuying, home building, home borrowing, and home improvement. Real estate -- not short-term interest-rate adjustments for overnight borrowing -- is now the vehicle which moderates the recession.

For more articles by Peter G. Miller, please press here.