Finally, it is official. The long awaited telltale signs that the US has entered into a recession has come about. It might not have been the straw that broke the camel’s back, but the latest US unemployment data seemed to have concentrated minds, especially those at the Federal Reserve. The implication is that the Fed could be galvanized into considering more an aggressive action in terms of a cut in US interest rates to address the growing downside risks to the US economy. If this recession and cut in interest rates materializes, then it has implications for the wider world, whether those that depend on US imports to sustain their growth or for those countries that continues to peg their currencies against the weaker dollar.

While the White House insisted that the news about the US economy was “mixed” and that growth should strengthen late in the year once it was past the worst of the housing market slump and hopefully a fall in oil prices, not many others seemed to be sharing this optimism. Economists of all persuasion, and leading Investment Banks such as Merrill Lynch and Goldman Sachs were more gloomy, and even the Fed Chairman Ben Bernanke was unusually blunt in his assessment, unlike his rather more ambiguous predecessor Alan Greenspan, who seemed to relish confusing financial analysts with Delphic pronouncements.

Bernanke said that the Fed would “stand ready to take substantive additional action” to support growth, and to provide adequate insurance against downside risk. The word “substantive” was music to many ears in the financial markets, which was interpreted as increasing the likelihood of a 50 basis point rate cut when the Fed meets again.

The US employment numbers contained not only a disturbing drop in private sector employment, but also an alarming jump in the headline unemployment rate, seen as a potentially ominous sign of further bad news to come.

Employers added a mere 18,000 jobs in December - the weakest performance by non-farm payrolls since 2003, when the economy was starting to recover from the short lived recession that followed the collapse of the dotcom bubble. Most economists had expected 70,000 jobs to be created in December. There are those that now expect a series of more bad news to emerge the USA - typified by financial loss announcements from banks, clearer signs of housing weakness spillover into the broader economy, and inflationary flows from higher oil prices.

The Federal Reserve might not wait until the Jan. 29-30 meeting to take action, and there is a great possibility that the latest Bernanke comments could just be positioning the Fed to take an action on rates inter-meeting. That window could be as early as next week for such a tactical move.

The Federal Reserve Board of Governors each cast a vote for taking interest rate action or not.

Those favoring an inter-meeting move will point to what they see as further signs of the risk of adverse scenarios that are materializing and the need to demonstrate that the Fed is ahead of the markets and is willing to take the necessary bold actions to stem a recession.

The Fed board seems to have been stung by earlier criticism that they did not earlier act aggressively enough in cutting interest rates, and where forced to do so in two stages, first by 25 basis points and then by 50 basis points when all indications were that the sub-prime losses were far greater than admitted to by banks.

And how will the other major economies shift gears? The European Central Bank (ECB) seems to recognize a higher near-term downside risk to growth but there is still no sign of relaxation of its tightening bias. The Europeans seemed more confident than the Americans that higher oil prices seem to translate into temporary external induced price shocks, but this time round higher oil prices impacts have remained in place longer than expected.

As such, the tightening bias might still continue in Europe with no ECB rate cuts on the card in the near future. The Japanese economy is under growth pressure but the Bank of Japan might consider an upward move in interest rates due to a rise in inflation from zero.

For countries that depend heavily on US exports to fuel their economic growth, the looming US recession is a worry. For the Chinese, the largest exporters to the US, this is particularly worrying. The Chinese have seen domestic inflation at around the 6 percent in the last quarter 2007, and Beijing is prepared to let the Yuan rise a bit faster in 2008.

Dr. Mohamed Ramady is visiting associate professor, Finance and Economics at King Fahd University of Petroleum and Minerals.