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Just a few months ago, the idea that the U.S. Federal Reserve Board might have to cut interest rates again was greeted with scorn. The general feeling was that the previous 11 cuts had done their job, and the world's largest economy was well on the road to recovery — the dot-com bubble and subsequent recession only a memory. Now, another cut is all but a done deal, and the big question is whether it will do any good or not.

Depending on who you believe, the Fed has either used up virtually all of its rate-cutting ammunition already — leaving the U.S. economy to limp along as best it can, or at worst sink into the same deflationary miasma as Japan did — or Alan Greenspan has plenty of juice left in the old economic stimulus toolbox and the deflationary rhetoric is just carping by market bears, doomsayers and Federal Reserve critics in general.

According to the first argument, 11 interest rate cuts have already taken the benchmark Fed funds rate to 1.75 per cent, the lowest level in over 40 years, and the U.S. economy is still not running on all cylinders. In fact, it has been running on just one cylinder for the past year or so: the consumer, whose normal house- and car-buying patterns have been inflated by zero interest-rate financing and other such inducements.

The problem, as some economists see it, is that the consumer spending wave that has kept the economy afloat seems to be running out of oomph, and as yet there are few signs of stronger industrial activity coming along to pick up the slack. If 11 successive interest rate cuts haven't managed to convince the corporate sector to spend more, some Fed critics argue, why would another rate cut have any effect at this point?

In fact, some Fed-watchers were talking about the central bank being out of ammunition over a year ago. "The Fed has left little wiggle room to stimulate the economy in the future," money manager Brian Bruce of PanAgora Asset Management said last November. Finance professor Marc Lipson said at the time the Fed had to worry about "reaching the point that the Japanese economy has reached, where the consumer confidence is so bad that lowering interest rates doesn't affect their behaviour at all."

The classic term for this state of affairs is a "liquidity trap," a state in which interest rates have already gotten so low that lowering them even further has very little effect on either consumer or corporate spending patterns. And what often follows this kind of liquidity trap? The Fed's worst nightmare: deflation — perhaps even the kind of deflation that has kept Japan's economy in the dumpster for more than a decade.

On the other side of the argument are economists such as Russell Sheldon of BMO Nesbitt Burns, who wrote a report for clients recently entitled "The Myth of Fed Impotence," in which he said "readers are about to be deluged with stories about Fed impotence, suggesting the final rate cuts won't matter." According to Mr. Sheldon, such stories "are perfectly normal for the end stage of any Fed easing process and can safely be ignored," because the benchmark Fed rate "is not as low as you think."

The BMO economist says while the Fed funds rate may be at a 40-year low, it isn't that low on a historical basis if you use the Federal Reserve's preferred inflation benchmark, which Mr. Sheldon describes as "smoothed core PCE." Using this measure, the Fed moved rates as low as negative 1 per cent in real terms after the 1990 recession, and has done so in previous downturns as well. On that scale, U.S. interest rates are still well above zero, and therefore there is still room for more cuts ahead.

Although some bears argue that lowering rates even further is unlikely to help stimulate new corporate spending very much, Mr. Sheldon disagrees. The Fed is not "pushing on a capital spending string," he says; in fact, the central bank still has "175 basis points left to fire, and no reason to hold back. There is no emergency. Instead, we are watching the Maestro orchestrating the conclusion to his long-running symphony."

And yet, at one of its meetings earlier this year the Federal Reserve Board itself discussed the possibility that the economy might keep deteriorating at a time when rates were already low, and that such a state of affairs might make it "impossible to ease monetary policy sufficiently through the usual interest rate process." By Mr. Sheldon's calculations, the U.S. isn't there quite yet — but then who's to say for sure?

Look for exclusive Mathew Ingram commentary at GlobeInvestorGold