Federal Reserve Chairman Ben S. Bernanke may be readying the deepest interest-rate cut in a generation as the central bank struggles to prevent a meltdown in financial markets and a recession.
Traders predict the Federal Open Market Committee, meeting today in Washington, will lower the overnight lending rate by a full percentage point or more, based on futures prices in Chicago. That would be the biggest reduction since 1984, when Paul Volcker led the central bank, and would bring the benchmark rate down to 2 percent.
The Fed took emergency steps over the weekend to stave off a financial panic, lowering its rate on direct loans to banks and becoming lender of last resort for Wall Street’s biggest dealers in government bonds.
“The Fed has moved very aggressively to deal with liquidity problems that are major,” said former Fed Governor Lyle Gramley, now a senior adviser at Stanford Group Co. in Washington, who said today’s reduction may be as much as a full percentage point. “They need to be aggressive on the monetary policy side. This is the worst crisis we have faced in more than 50 years.”
The severity of the crisis was underscored by the Fed’s emergency action on the evening of March 16, the first weekend policy shift since 1979. A week ago, the debate among economists was whether the Fed would cut by 50 basis points or 75 basis points.
Now, a reduction of 1 percentage point is seen as a sure bet among futures traders and some anticipate a move of as much as 1.25 percentage points. Either would be the deepest since Volcker’s Fed lowered the federal funds rate to 10 percent from 11.75 percent in October 1984.
Recent economic data suggests the first recession since 2001 may have begun in December or January. Harvard University economist Martin Feldstein, a member of the committee that officially declares when a recession has started, said last week that he believed a recession was under way and it could be the most severe since World War II.
“They are worried about the spillover effects of financial markets and what they can do to keep that from happening,” said Robert Eisenbeis, former research director at the Atlanta Fed who is now chief monetary economist at Cumberland Advisors Inc. in Vineland, New Jersey.
“Bernanke believes the economy is in a very serious situation right now,” said Paul Kasriel, director of economic research at Northern Trust Co. in Chicago. “The Fed is worried about a very severe credit contraction that can cause an even weaker economy.”