WASHINGTON – The Federal Reserve is expected to aggressively lower interest rates in its intensified battle against the credit crisis and spreading economic weakness. The question is whether all of the effort will turn the tide.
Federal Reserve Chairman Ben Bernanke and his colleagues have already been working overtime, employing a variety of novel approaches to keep the economy out of a recession or at least moderate the impact of any downturn.
More relief is expected Tuesday when the central bank is expected to cut a key interest rate by between one-half and a full percentage point.
"There is no reason for the Fed not to be aggressive," said Mark Zandi, chief economist at Moody's Economy.com. "The economy is in a recession, the financial system is in disarray and inflation is low."
The Fed's target for the federal funds rate, the interest that banks charge each other on overnight loans, currently stands at 3 percent, down from 4.25 percent at the beginning of this year. That was before global market turmoil in January prompted an emergency three-quarter-point cut on Jan. 22 and a half-point move eight days later, the biggest reductions in a single month in more than a quarter-century.
Many economists believe the Fed will deliver another three-quarter-point cut or perhaps even a full one-point reduction at Tuesday's meetings because Fed officials will not want to disappoint fragile financial markets, which have been on a rollercoaster ride in recent days as they have watched Bear Stearns nks starting March 27 for a period of up to 28 days in return for a like amount of the investment banks' shunned mortgage-backed securities. The Fed also announced recently that it was boosting the size of special loans it has been making since December to commercial banks.
The scale of these actions underscored the threat facing the economy from a severe credit squeeze that began with a wave of defaults on subprime mortgages last year but has now spread to other parts of the credit markets, triggering multibillion-dollar losses by some of the country's largest financial institutions.
Analysts said it will take some time to determine whether the Fed has done enough to stem the wave of panic among investors.
The rapid decline of Bear Stearns stock — which had a market value of about $20 billion in January, only to collapse to a sales price of $2 per share, or about $236 million, this past weekend — has given investors the chills.
"The Fed is trying very hard to figure out how to calm the markets down, but so far it hasn't been very successful," said David Wyss, chief economist at Standard & Poor's in New York. "Markets are worried that there might be another Bear Stearns out there."