Fed's rate decision will reveal latest thinking on economy

WASHINGTON -- The Federal Reserve makes another highly visible statement on the economy today when its Federal Open Market Committee announces its decision on interest rates at 2:15 p.m. ET Tuesday.

The policymaking committee met amid growing calls for a cut in its key interest rate target, to bolster financial markets after Monday's stunning Lehman Bros. bankruptcy-protection filing and stock market plunge.

Urgently trying to keep cash flowing to prevent a Wall Street meltdown, the Fed on Tuesday pumped an extra $50 billion into the nation's financial system to help ease credit stresses.

The Federal Reserve Bank of New York's action to pump cash into the financial system was in addition to its regular market operations, which were slated to inject $20 billion into the system Tuesday.

The cash injection was in the form of short-term repurchase agreements in which the Fed makes the loans, accepting agency and mortgage-backed securities as collateral. A repurchase agreement or repo, is a contract in which the seller of securities, in this case financial companies, agree to buy them back at a specified time at a specified price.

Last week, seeing how prices have run up, 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 its scheduled review. A rate cut, it is feared, could add to inflation as it boosts economic activity.

But with credit markets in distress, sentiment was changing. 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 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.