Prometheus 6

But the Fed is under time pressure in part because it pointedly raised expectations of a broader rate cut last Friday when it declared that it was “prepared to act as needed” to help the economy weather disruptions in the markets.

The Fed’s first move — to entice banks into borrowing through its so-called “discount window” — has done almost nothing to jumpstart lending, many analysts now say.

Fed Seeks Balance as Investors Clamor for Action
By EDMUND L. ANDREWS

WASHINGTON, Aug. 21 — Wall Street thinks the Federal Reserve is running short of time.

After another day of restless anxiety in the world’s credit markets, most lenders and investors remained fearful of all but the very safest Treasury securities, and new figures showed that the rate of foreclosures in the housing market in July was almost double that of a year ago.

Analysts now say that the central bank’s move last Friday to restore confidence by encouraging banks to borrow directly from the Fed at a lower cost has had only limited impact so far and that the Fed will need to take more drastic action by cutting its benchmark interest rate soon if it fails to see more progress.

“I would calibrate it in days, not weeks,” said Richard Berner, chief United States economist at Morgan Stanley. “If the money markets are still in disarray a few days from now, I would think the Fed is going to have to take additional steps.”

But the central bank’s chairman, Ben S. Bernanke, and most other Fed policy makers are extremely reluctant to have the Fed jump to the rescue with an interest rate cut simply to relieve the woes of investors on Wall Street or to bail out hedge funds and others that many blame for the current problems caused by excessive investment in risky mortgages. Instead, the Fed is much more closely watching for clues to whether the housing market itself and consumer spending are weakening before deciding that it needs to cut interest rates.

That means an imminent reduction in the Fed’s key policy tool, the federal funds rate on overnight loans between banks, is still far from a sure bet.

The big issue facing the Fed — whether or not to cut the federal funds rate by a quarter point or even half a point from its current level of 5.25 percent and when to do so if it decides a cut is warranted — poses major risks for Mr. Bernanke. Since taking over the Fed in February 2006, Mr. Bernanke’s hallmark has been a cool patience and willingness to stick with his economic game plan even when it clashed with the expectations on Wall Street.

But Mr. Bernanke does not have the luxury of time. Lessons from the last big credit crunch, which came after Russia’s financial meltdown in August 1998, show that timid action has little effect, while a quick and decisive follow-up move can make a major difference.

On the other hand, any sign that the central bank has itself become overly nervous about the situation by moving precipitously could compound the anxiety that has paralyzed investors about everything from mortgages to commercial bonds.