Sentiment shifts on whether Fed will cut rates today

WASHINGTON -- The Federal Reserve meets Tuesday afternoon amid growing calls for a cut in its key interest rate to bolster financial markets after Monday's stunning Lehman Bros. bankruptcy-protection filing and stock market plunge.

Last week, many economists and market participants predicted the Fed would hold its target for the rate, a benchmark for many consumer and business loans, steady at 2% when it meets for a scheduled review.

With credit markets in distress, sentiment was changing on Monday. Further, the actual rate was higher than the Fed's target Monday, even though the central bank provided extra liquidity to the markets.

Brian Bethune, chief U.S. economist at Global Insight, said that without a rate cut to buffer the pain, "The risks to the financial system and the economy are massive. … The economy is very weak. The recession wolves are pounding down the door."

Supporters of a rate cut also noted that crude oil prices fell $5.47 Monday to $95.71 a barrel, the lowest level in seven months, which could help blunt inflation pressures. Production at factories, mines and utilities declined in August, in another sign of a weakening economy. The economy grew at a 3.3% annual rate in the second quarter but is expected to slow significantly through the end of the year.

Others discounted the possibility of a rate cut. "I really don't think cutting rates is the answer," says Kim Rupert of Action Economics. RDQ Economics said in an advisory that a rate cut wouldn't solve market problems, but that its economic experts are concerned about the possible impact of inaction, given rising market expectations.

Vince Reinhart of the American Enterprise Institute, a former top Fed economist, says that if the Fed doesn't cut rates Tuesday, it should suggest a willingness to do so later. "Easing does lift some credit constraints. … It won't necessarily do a lot, but it is (a step) in the right direction."