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 today or possibly later this year, economists said Monday.
WASHINGTON — 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 today or possibly later this year, economists said Monday.
Just a few days ago, a rate cut appeared largely off the table. Now it has emerged as a possibility as the Fed prepares to meet against a backdrop of historic upheaval in the U.S. financial system.
Lehman Brothers, the country’s fourth-largest investment firm, filed for bankruptcy protection on Monday. And, Bank of America announced it is buying Merrill Lynch in a $50 billion deal.
Before those extraordinary events, the prevailing wisdom was that the Fed would hold its key interest rate steady at 2 percent at its meeting today.
Most Read Business Stories
- The penthouse atop Smith Tower is on the rental market for the first time
- Amazon sued by Black manager over alleged racial discrimination and sexual harassment
- Washington state ‘literally failed workers,’ and fixing the unemployment system won't be easy
- Downtowns will be back, but Seattle has choices to make
- Costco, Whole Foods rise in Greenpeace rankings of grocery chains' plastic use
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. 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 will decide today to stay the course and leave rates alone, fearing another cut would hurt the value of the U.S. dollar more.
Were the Fed to slice its key rate, the prime-lending rate for millions of consumers and businesses — now at 5 percent — would drop by a corresponding amount.
The prime rate applies to certain credit cards, home equity lines of credit and other loans. The Fed’s key rate and the prime rate are at four-year lows.
Even if the Fed doesn’t lower rates today, analysts believe the central bank could switch signals and suggest it could cut rates sooner down the road.
Over the last few months, Bernanke and his Fed colleagues have signaled that the central bank’s next move on interest rates would probably be an increase to fend off inflation. Given all the economic and financial stresses, though, economists are now saying the likelihood of a rate increase over the next six to nine months is virtually nil.
A recent retreat in record-high oil prices and improved readings on wholesale prices, however, gives the Fed more leeway to lower rates if needed or at least hold them steady.
The Fed in June halted its most aggressive rate-cutting campaign to shore up the economy out of fears that those low rates were aggravating inflation. It didn’t budge the rate at the last meeting in August for the same reason.