Fed Expected To Cut Rates At Meeting

The Federal Reserve is expected to cut interest rates Wednesday by at least a half-percentage point to 1 percent. Economists believe the Fed will cut rates because of the current financial turmoil and fears that there might be a prolonged recession.

This comes just three weeks after Fed policymakers cut the federal funds rate by a half point in coordination with several other central banks around the world.

"And the markets are expecting they'll keep going and cut them further, perhaps" to 0.5 percent, by year's end, David Wessel, economics editor at The Wall Street Journal, tells Renee Montagne.

The Fed is trying to offset the credit crunch that has frozen lending. The previous rate cut helped some, but not enough, Wessel says.

"Another rate cut may not be a big help, but it would probably be worse for the economy if they didn't cut them at all," he adds.

The Fed move, scheduled to be announced at 2:15 p.m. ET, would reduce rates consumer pay on adjustable-rate loans and on some credit cards.

But the last time rates were this low, under former Fed Chairman Alan Greenspan, they sparked excessive borrowing. "I think the Fed worries about that," Wessel says. "The conventional wisdom inside the Fed now is with the benefit of hindsight they kept rates too low for too long during the Greenspan years and that created this housing bubble ... And they'd like to avoid that again.

"But you don't want to fight the last war, and with the economy suffering so much, with so much at stake, they are doing the only thing they can do, which is administer this low interest rate medicine," he says.

The challenge for the Fed will be to decide when to raise rates again, once the economy improves. For now, analysts are estimating the economy contracted by about 0.7 percent during the third quarter and will shrink even more during the fourth quarter and the first three months of 2009. They also see unemployment eventually rising to 7.5 percent or 8.0 percent, from last month's 6.1 percent.

Even when the economy comes out of recession, it's expected to grow very slowly.

"What we are seeing now is the ripple effects of the credit crunch spreading out throughout the economy," not just in the U.S. but worldwide, "so our export markets are going to be lousy as well," Wessel says.

The government's bailout of the financial system will take time to have its effect, he says. "The medicine will not make the patient better until the banks feel healthier and begin to lend again, and we're clearly not there yet."

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