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Wreckage from a massive crisis on Wall Street could prompt the Federal Reserve to do an about face and once again cut a key interest rate this week or possibly later this year, economists said Monday (Sept. 15).
Just a few days ago, a rate cut appeared largely off the table. But, according to an Associated Press, now it has emerged as a possibility as the Fed prepares to meet Tuesday against a backdrop of historic upheaval in the U.S. financial system.
Lehman Brothers Holdings Inc., the country’s fourth-largest investment firm, filed for bankruptcy protection on Monday. And, Bank of America is buying Merrill Lynch in a $50 billion deal. The news rocked Wall Street, which showed a 200-plus point loss through mid-day trading.
“It puts a Fed rate cut back on the table,” said Stuart Hoffman, chief economist at PNC Financial Services Group.
Seeking to calm frazzled markets, President Bush assured the country his administration is “working to reduce disruptions and minimize the impact of these developments on the broader economy.”
During emergency sessions over the weekend, Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson made clear there would be no government bailout of Lehman. The Fed took steps Sunday night to keep cash flowing to major Wall Street players by expanding its loan programs, however.
Before the extraordinary events over the weekend, the prevailing wisdom was that the Fed would hold its key interest rate steady at 2% at its next meeting on Tuesday.
Although that still could happen, a growing number of economists and investors now believes there is a chance the Fed could reduce its rate by one-quarter or even a bolder one-half percentage point on Tuesday. Much hinges on the information the Fed gets about how the inner workings of the U.S. financial system are functioning and how Wall Street investors react to the crisis.
“It is a different ballgame. Anything can be expected and a rate cut is possible,” said economist Richard Yamarone, economist at Argus Research. Yamarone thinks the Fed on Tuesday will decide to stay the course and leave rates alone, fearing another cut would hurt the value of the U.S. dollar more. Hoffman, too, isn’t convinced a rate cut will happen.