17 March 2008 21:16 [Source: ICIS news]
HOUSTON (ICIS news)--The US Federal Reserve will likely lower the key federal funds rate by at least 50 basis points as it tries to counteract several forces dragging down the economy, economists said on Monday.
The drop - expected on Tuesday - would take the rate down to at least 2.5%.
"It clearly shows that they are worried - extremely worried - about the financial system," said Dan Meckstroth, chief economist for the Manufacturers Alliance. He expects a drop of at least 50 basis points.
Kevin Swift, chief economist for the American Chemistry Council (ACC) said he also expects a 50-point drop.
David Huether, chief economist for the National Association of Manufacturers (NAM), predicted a drop of 75 points.
Any drop would follow the tightening in the nation's credit markets, which started in the summer as a result of rising defaults among exotic mortgages, Meckstroth said.
Institutes that held investments backed by such mortgages could no longer find buyers, he said. At the same time, those same institutions are being pressured to raise cash.
The problems that started in the summer has since spread beyond subprime mortgages, Meckstroth said. "The Fed really has not been able to stop it."
In addition to the credit crisis, the Federal Reserve is contending with two other issues - any of which is sufficient to push the US economy into a recession, Meckstroth said.
The US housing market is in a pronounced downturn, with sales and prices plummeting. Oil prices are at record highs.
"We've had recessions for less severe shocks than what we are seeing right now," Meckstroth said.
The US economy entered into a recession in December, he said. "The risks are very high for a severe recession."
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