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The Federal Reserve’s enormous power over the economy was demonstrated again on Wednesday with a brief announcement that in minutes added billions of dollars to stock market valuations. 

The exultation in the stock market, depository for a large portion of the financial assets of more than 50 million households, was remarkable in itself, but more importantly as an indicator of things to come. 

Stocks don’t rise on the basis of past or present performance, but on prospects for earnings. Lower interest rates not only cut costs and so help to improve earnings, but they spur expansion plans now on hold. 

They can also be an alternative to the cost-cutting practice of mass layoffs, almost a daily occurrence among technology companies that in recent months saw their markets dry up as consumers put off purchases. 

And, equally significantly, they can lower the rates debt-ridden consumers – the latest reports show them borrowing to maintain life styles – must pay on credit-card balances, assuming banks are quick to comply. 

The broadest reaction to the cut is likely to be an improvement in mass psychology, affecting businesses, consumers and investors, all of whom have been licking their wounds and putting spending plans on hold. 

Consumer confidence had remained surprisingly strong. Business had been postponing capital spending projects, such as for new plants and equipment. 

Alan Greenspan, the Federal Reserve chairman, has repeatedly expressed concern about the dangers inherent in using high interest rates to restrain the economy. And those dangers seemed to have been rising. 

Bad enough that consumers, who account for two-thirds of economic activity, had lost so much of their investment and pensions assets. Now the Fed feared falling corporate earnings would cut business spending too. 

The Fed’s job is to anticipate and guide the level and direction of economic activity, balancing supply and demand in a quest for sustainable, low inflation growth.  

John Cunniff is a business analyst for The Associated Press