What happened to the Golden Years?
Fed set to cut rates again in effort to stem crisis
AFP - 2 hours 11 minutes ago
WASHINGTON (AFP) - - The Federal Reserve is likely to follow its emergency weekend move to help ease credit gridlock with a large rate cut Tuesday in a bid to stem a mushrooming financial crisis, analysts say.
The intensifying market turbulence has led economists to anticipate a hefty cut in the federal funds interest rate, possibly as much as a full percentage point, as the central bank steps up its battle against a global credit crunch.
Joseph LaVorgna, senior economist at Deutsche Bank, said he expects a a cut of a full percentage point in the federal funds rate from 3.0 percent to 2.0 percent.
"A deeper and longer recession seems more likely now than a brief, mild one," he said, saying this could mean the rate may be slashed to as low as 1.0 percent by the end of June.
Others say the Fed must act to avert a broader economic meltdown.
"We are in the midst of the most pervasive financial crisis in a generation, which has destroyed untold sums of wealth in housing and financial assets and has driven the US economy into recession," said Sherry Cooper, chief economist at BMO Capital Markets.
Cooper said Fed members "will continue to act aggressively until they see sustained stabilization. Let's hope they are successful."
Yet analysts are debating how much the US central bank can do to alleviate the crisis underlined by a spectacular meltdown at Bear Stearns, a Wall Street investment giant that was felled by the subprime real estate meltdown.
Rushing to head off a global panic after the Bear Stearns episode, the Federal Reserve moved to keep cash flowing in the financial system with a cut in its discount rate and a pledge of aid to the brokerage system Sunday.
A quarter-point cut to 3.25 percent was made to the primary credit rate, which is the rate offered at the Fed's discount window for loans to institutions "in sound condition."
The Fed also said it would make liquidity available starting Monday to "primary dealers," which include brokerages that were not previously eligible for direct loans from the central bank. The Fed board also extended the maximum time of discount window loans to 90 days from 30 days.
The moves came just ahead of a regularly scheduled Fed meeting Tuesday where the panel headed by chairman Ben Bernanke is widely expected to cut its base rate further in an effort to get credit flowing.
"These actions demonstrate the extreme lengths, if there was ever any doubt, that the (Fed) Board of Governors are willing to go to" to keep markets functioning, said Bob Eisenbeis, economist at Cumberland Advisors.
The Fed has already slashed its federal funds rate by 225 basis points from 5.25 percent last September, in an effort to ease housing and credit market stress. But that has not been enough to avert worries about a breakdown in the system.
Still, most see a further cut as inevitable at Tuesday's Federal Open Market Committee meeting.
"It really doesn't matter whether the Fed goes a half-point point, one point or even more since this is not simply an interest rate issue. It is the liquidity crisis," said Joel Naroff of Naroff Economic Advisors.
"The Fed is in full crisis mode, finally, and while history will determine how well or poorly Mr. Bernanke performed, right now he is doing all he can."
The Fed has been forced into a series of extraordinary actions like Sunday's between its regular meetings amid troubles in various parts of the financial system.
Still, some analysts said it was not clear how much the Fed can do to prop up sagging confidence.
"The Fed has pulled nearly every non-conventional rabbit out of the hat to provide liquidity," said Merrill Lynch economist David Rosenberg.
"The next steps may be to try and prevent a contagion, or a domino impact, and the Fed has responded to this prospect by opening the discount window to the dealer community."
But Rosenberg added that the Fed, which has pumped an estimated one trillion dollars into the banking system, has no magic bullet.
"What we are learning first-hand is that the Fed can't solve all of the world's problems," he said
"The Fed cannot recapitalize the banking sector, nor can it renew investor confidence in the quality of opaque financial sector balance sheets."
Economist Brian Wesbury at First Trust Portfolios calls the Fed's aggressive rate cuts "a mistake."
"Interest rate cuts since August have been counterproductive," he said. "They have created an incentive for businesses and consumers to postpone activity. Why do something today if rates will be lower next week or month?"