Will interest rate cut be enough to prop up the economy?

WASHINGTON -- The Federal Reserve's quarter-point interest rate cut Tuesday was aimed at preventing a recession that would end the economy's six-year expansion. But in the minds of some, the Fed is fighting a losing battle.

Headwinds are facing the economy: a continued slump in the housing market that is showing no signs of bottoming, elevated energy costs and tightening conditions in credit markets that threaten to make borrowing more difficult for businesses and consumers. And there are signs that consumers, the main engine for the U.S. economy, may be pulling back.

Fed policymakers cut their target for short-term interest rates, which influence borrowing costs across the economy, by a quarter-percentage point to 4.25%. It was the third cut from the Fed in less than three months and brought the rate to its lowest since January 2006.

Still, some economists, such as Moody's Economy.com chief economist Mark Zandi, say the odds of a U.S. recession are above 50%. Merrill Lynch North American economist David Rosenberg predicts consumers next year will cut their spending for the first time since the downturn of 1991. That would lead the overall economy into recession, marked by rising unemployment and softening business investment.

Global Insight U.S. research director Nigel Gault says the economy is in the "danger zone," with no growth in the fourth quarter. A shock, such as a renewed surge in oil prices, would push the economy into recession, he says.

"We're back to a nervous climate," says Joseph Bushey, president of Atlanta-based POS World, which sells such tech equipment as bar-code readers, touch-screen monitors and receipt printers.

Profit margins have fallen, in part because of higher shipping costs. And he has had to be more stringent with credit after some of his clients have gone bankrupt or fallen behind on their bills. Wild swings in the stock markets are also giving him jitters, he says.

"I'm a little bit nervous about where we are going in the next couple of years," Bushey says. "Every time I hire somebody, I keep thinking that I hope this isn't somebody I'm going to have to lay off next year."

Counting on the Fed to help

There are also a number of strengths in the economy, such as low unemployment and healthy export growth. Perhaps most important, Fed Chairman Ben Bernanke and his colleagues have shown a willingness to do what is necessary to keep the economy and the credit markets on track.