With financial markets spooked about possible economic turmoil ahead, Federal Reserve policymakers are set to decide on interest rates at a meeting concluding on Halloween.
While American children parade in the streets in ghostly attire seeking treats, the central bank is widely expected to implement its second rate cut in as many months.
This could end up soothing frayed nerves or sending an eerie chill through markets at the conclusion of its two-day meeting Wednesday, analysts say.
The Federal Open Market Committee headed by chairman Ben Bernanke surprised some on September 18 with a half-point cut, larger than expected, in the base federal funds rate to 4.75 percent to ease stress in the housing and credit markets.
Now, with markets haunted by concerns about more troubles ahead for real estate and the financial sector, many expect the Fed to take out further insurance with another cut of 25 basis points, or possibly more.
Peter Morici, economist at the University of Maryland, said he sees the potential for another bold move by the Fed in light of the deterioration in the housing market that has pressured the financial sector including mortgage giant Countrywide Financial and investment bank Merrill Lynch.
"Certainly a half-point cut would be in order in view of the revelations of Countrywide and Merrill," Morici said after the Wall Street bank wrote off 7.9 billion dollars in soured investments and Countrywide said it was ready to refinance 16 billion dollars in loans.
"If the Fed doesn't act decisively, the economy is at risk of calamity."
In light of spreading housing and credit market woes, "the risk of recession can no longer be placed below 50 percent," 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."
Others say the economy is not ready to meet the grim reaper and that conditions may perk up with some modest stimulus from the central bank.
Richard Kelly, economist at TD Bank Financial Group, said he expects one quarter-point cut in rates, with the Fed subsequently on hold into 2008.
"We're not seeing the weakness in the US economy that would justify big rate cuts," Kelly said.
"You won't see positive growth in residential investment until the end of 2008, but that only makes up five percent of the US economy. Exports are booming, and that's three times larger than the housing market."
Kelly added that consumer and business spending remain positive and job growth although modest, is creating enough new positions to offset the weak segments of the economy.
"We're still looking at a mid-cycle slowdown" from a pace of about three percent in the third quarter to roughly two percent in the fourth quarter and early 2008, he said.
Sal Guatieri at BMO Capital Markets argues that the economy is weak enough to prompt cuts in the funds rate to 4.00 percent by early next year.
"We don't expect the economy to fall into recession but we are looking for a 'growth recessson' with GDP around 1.5 percent," he said.
"There are tentative signs of spillovers to the broader economy of the housing correction and credit market turbulence. Business investment is cooling and surveys suggest business confidence is declining."
Under these circumstances, Guatieri said the Fed will cut rates and send a message that it "will do whatever it takes to keep the economy out of recession."
Others argue a rate cut would be a return to the easy-money conditions that fueled the real estate boom-and-bust cycle. These critics argue the economy still needs to recover from the speculative boom after the Fed cut its rate as low as one percent in 2003 in an effort to avert deflation.
"The policy problems of today that face the FOMC involve attempting to cushion the economy from the costs of cleaning up the consequences of the excesses that resulted from the last episode of risk management," said Robert Eisenbeis, a former member of the Atlanta Fed, in a commentary distributed by Cumberland Advisors.
"The irony is that we find ourselves in the undesirable position where experience now suggests that policies designed to stabilize the economy have actually had the unintended consequence of increasing economic instability."
