WASHINGTON (MarketWatch) -- Faced with tightening credit markets, Wall Street is clamoring for the Federal Reserve to cut interest rates, but so far there is no indication that the central bank will oblige.
But many economists are starting to pencil in a rate cut at the Fed's October 31 meeting. They say it will be clear by then that the economy - and not only foolish investors - would benefit. "I do expect them to ease, but September may be too early," said Mickey Levy, chief economist at Bank of America. "I think [a rate cut] is contingent on the economy. The Fed will ease only if these events result in a marked deterioration in economic performance," he said. The Fed has three meetings left this year: Sept. 18, Oct. 30-31 and Dec. 11. Economists said the chances of an inter-meeting move remain very low. The Fed flooded the financial markets with cash last week, but that was just a temporary loan that's already been paid back. A rate cut in the overnight federal funds rate would go further by adding cash into the markets on a permanent basis, thus restoring both confidence and liquidity to markets, some economists and strategists say. Financial markets are betting that Fed chairman Ben Bernanke and his committee will cut rates, and soon. Fed funds futures are pricing in a 100% chance of a cut in September, with a small chance of a cut coming before the meeting. The market expects the fed funds rate, now at 5.25%, to sink to 4.75% by year end. This could put pressure on the central bank to move sooner, some economists said. "By pricing with such confidence the chances of a rate cut, the markets are essentially forcing the Fed's hand," said Tony Crescenzi, chief bond market strategist for Miller Tabak & Co., in an email. "The Fed can follow the markets, a preferred approach when the economy has experienced inflation pressures." "A lower funds rate would be appropriate in the current environment," TV host James Cramer put it more bluntly in a now-famous tirade: "They're nuts!" if they don't cut. "This is Armageddon!" Watch Cramer. But others say the Fed would be nuts if they did cut. "Market turmoil is not a reason to cut interest rates," wrote Gabriel Stein, an analyst with Lombard Street Research. "Central banks are emphatically not in the business of rescuing investors from failed investments," Stein said, quoting philosopher-insect Jiminy Cricket: "You've buttered your bread, now sleep in it!" Central banks may not have a duty to rescue investors, but the Fed does have an obligation to keep the financial system fluid. Indeed, that was the reason the Fed was created in 1914. But there's a thin line between providing enough easy money to keep the system from seizing up and providing so much that you've effectively bailed out investors. Fed officials are smarting from criticism that they always stand ready to rescue their buddies on Wall Street. Rewarding dumb investments would create a moral hazard, Fed officials worry. It's true that the Fed cut rates in the 1987 stock market crash and in late 1998 when Long-Term Capital Management and the Russian default were causing credit markets to seize up. But the Fed hasn't always protected Wall Street: The Fed pushed interest rates higher in 2000 and kept them there during the market's big slide. The Fed cut rates only once it became obvious that a recession was imminent. Fed officials have not talked much in public as banks and investment funds face mounting losses because of exposure to mortgage-related investments. The only official to comment publicly, St. Louis Fed President William Poole, said the Fed "should respond to market upsets only when it has become clear that they threaten to undermine achievement of fundamental objectives of price stability and high employment, or when financial-market developments threaten market processes themselves." Stephen Cecchetti, a former Fed economist who now teaches at Brandeis, said last week's liquidity infusion was not designed to rescue investors. "What the central banks did was put the cash into the banking system in order to ensure that markets would continue to operate normally," Cecchetti wrote. "Interest rate cuts, a policy change aimed at stabilizing medium-run inflation and growth, would not have helped and should not be expected. It is only when inflation falls convincingly that we can expect to see the federal funds rate come down." Cecchetti thinks inflation is on "a clear downward trend." Read the latest on the CPI. Related Blog Posts & Articles In This Story Related Stories Factory growth stalls in Philly region in August U.S. housing starts hit 10-year low in July; permits also lower Jobless claims continue rise in latest week
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