It seems absurd now, but there was a time when people invested good money in pet product e-tailers; when Manhattanites worried whether the paper riches of dotcom billionaires were pushing up property prices; and when the Federal Reserve was preoccupied by the millennium date change.

In the wake of the September 11 terrorist attacks on New York and Washington, the dotcom frenzy and the Y2K crisis seem trivial.

Analysts have rushed to compare the impact on the financial system with previous crises, such as the Gulf war or the assassination of JFK. But there may be a closer parallel with events leading up to the bubble of early 2000.

On each occasion, the Fed has taken drastic action to make funds available to the financial system. Since September 11, the central bank has opened all the spigots of monetary policy. It cut rates sharply before the US stock markets reopened last Monday. It has lent more than ever through its discount window, the last resort for banks seeking to borrow, and entered into unprecedented currency swap lines with other central banks.

In the process, the central bank made clear it expected the Fed funds rate to drop well below its target of 3 per cent. Indeed, at one stage last week the rate dropped to 0.25 per cent. Banks needed the funds. The assault on the World Trade Center was more than a murderous attack on the tens of thousands working in New York's financial district; it was a strike at the often ignored infrastructure of Wall Street - the pipes and plumbing of the world's busiest financial centre. In the hours after the tragedy, payments jammed in the system as banks argued about who had paid what, to whom, and when.

Although central bank action can never compare with the efforts and sacrifice of paramedics and firefighters, it is fair to say that, under these extraordinary circumstances, the Fed acted as a fourth rescue service, one bent on saving the financial system.

Y2K, by comparison, was a false alarm. The Fed made funds available to institutions that, as it turned out, had no need of them. Critics contend that the central bank's action helped create the stock market bubble, by indirectly providing banks and investors with the wherewithal to back Pets.com and its like. According to this critique, when the crisis failed to materialise, the Fed's clawing back of excess liquidity helped trigger the crash.

Now the Fed finds itself with a sharper version of that dilemma. This time, its prompt and necessary stimulus has helped alleviate a short-term crisis. But within weeks the monetary easing will be augmented by federal aid, insurance pay-outs, the $15bn package of support for ailing airlines, and the possibility of broader economic assistance.

That prospect appears to be spooking the bond market. The price of the 30-year Treasury bond fell sharply last week. Alan Greenspan, the Fed chairman, told Congress on Thursday he was worried about the rise in long-term interest rates, which risks choking off recovery by raising the cost of borrowing. He warned against precipitate approval of a wider economic stimulus that could unbalance the economy.

Whether the long bond's slide represents a danger does, of course, depend on why investors are selling it. It could be a symptom of fear, as investors seek cash or more liquid instruments. It could represent concern about the amount of spending needed to fund the disaster relief effort, a military campaign and a possible economic bail-out. Or, more benignly, it could simply be a short-term reaction to increased supply at the long end of the yield curve.

Mr Greenspan finds himself in the uncomfortable position of appearing disloyal if he digs his heels in on further economic recovery plans, or imprudent if he lets the economic floodgates open. He knows, however, the Fed will have to deal with the consequences - as it did after the millennium bomb fizzled. The difference is that adjusting monetary policy at a time of unprecedented gloom and uncertainty is far more delicate than doing so when investors are over-exuberant.

In a world preoccupied by the threats of today and tomorrow, it may seem academic - even unpatriotic - to be considering the impact of policy decisions a quarter hence. But that is the difference between running the fire department and running the Federal Reserve.

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