Quarter-point cut, discount rate move seen likely

WASHINGTON (MarketWatch) -- Wall Street economists firmly expect a rate cut of a quarter of one percentage point and also engineer an even larger reduction in the discount rate when the Federal Reserve meets on Tuesday to consider its monetary policy.
The Fed is also expected to leave room for further easing by characterizing risks as tilted toward further economic slowdown.
The Fed is likely to cut the federal funds target rate to 4.25% and the discount rate to 4.5% from 5.0%.
Economists said almost nothing has gone right for the central bank since the last FOMC meeting on Oct. 31.
"The problem is what they've seen since Oct. 31 has certainly been a lot worse that I think we would see and we've seen a resumption of the strains in the capital markets," said David Resler, chief economist at Nomura Securities at a news conference on the 2008 outlook sponsored by the Securities Industry and Financial Markets Association.
Economists had hoped that the financial markets would gradually improve after remaining calm through October.
"But that calm gave way to new storms," Resler said.
Andrew Tilton, economist at Goldman Sachs, said this course of action would represent the "middle ground" between the FOMC's neutral policy stance at its last meeting on Oct. 31, which implied that interest rate cuts might end and market expectations of a good chance of a half-point cut in the federal funds rate target.
It would be a risky move for the central bankers to hold rates steady, he said.
"To hold the funds rate at 4.5% would be a major disappointment and would risk increasing the level of market stress at an already fragile moment," Tilton said in a note to clients.