Fed tipped to deliver US rate cut

The Federal Reserve is widely expected to cut US interest rates once again when it meets this week, analysts say.

A slew of recent concerns - including ongoing problems in the housing market and woes at Merrill Lynch - has underlined woes in the US.

The Fed cut interest rates in September from 5.25% to 4.75% as it tried to stimulate the flagging economy.

Analysts say a further reduction to at least 4.5%, or possibly even 4.25%, is likely on Wednesday.

Inflation risk

The last rate decision was seen as sending a strong signal that the US authorities were prepared to intervene to stabilise the markets and to prevent the US economy sliding into recession.

If the Fed doesn't act decisively, the economy is at risk of calamity Peter Morici, Economist University of Maryland

But some say that risk to the economy is still very real and that further action from the Fed is needed.

Others argue a rate cut would encourage reckless spending and promote a return to conditions that led to a boom-and-bust cycle in the property market.

There is also a risk of inflation becoming a greater problem if money is made cheaper to borrow, encouraging more consumer spending and takeover activity.

'Low interest needed'

Sales of new and used homes are at record lows as lenders tighten up on who they will give mortgages to.

And up to two million US families - especially those with sub-prime mortgages - could eventually lose their homes as the credit crunch intensifies, a Congressional committee report said last week.

There is also nervousness in the markets, with uncertainty still lingering over how much exposure various big banks have to the credit crisis.

Last week Merrill Lynch reported $7.9bn (£3.85bn) in write-downs for the third financial quarter of the year - leading to its first loss since 2001.

The losses - which were much larger than it had initially forecast - were largely caused by exposure to bad mortgage-related debt.

We're not seeing the weakness in the US economy that would justify a big rate cut Richard Kelly, Economist TD Bank Financial Group

And one of the country's biggest mortgage lenders, Countrywide, said it was ready to refinance $16bn in loans after customers were unable to meet repayments.

'Goalposts moved'

University of Maryland economist Peter Morici said that the Fed needed to make another bold rates cut.

"Certainly a half-point cut would be in order in view of the revelations of Countrywide and Merrill," Mr Morici said.

"We cannot get the economy firing on all cylinders until the mortgage market reorganizes and that probably requires a low-interest environment for some time."

"If the Fed doesn't act decisively, the economy is at risk of calamity."

And Capital Economics analyst Julian Jessop said that a 50 basis point cut could not be ruled out.

"Two weeks ago it looked like they'd be able to keep rates on hold in December. Unfortunately, since then, the goalposts have moved".

Richard Kelly, an economist at TD Bank Financial Group, expects the rate to fall to 4.5% but argued that problems in housing should not be allowed to get out of perspective.

"We're not seeing the weakness in the US economy that would justify big rate cuts," Mr Kelly said.

"You won't see positive growth in residential investment until the end of 2008, but that only makes up 5% of the US economy.

"Exports are booming, and that's three times larger than the housing market."