World financial news

Faced with a raging credit crisis and an economy that may be mired in recession, the U.S. Federal Reserve looks set to cut interest rates sharply on Tuesday in a bid to avert a possibly severe downturn.

The scenario confronting the central bank is a thankless one: the threat of a deep recession comes even as inflation licks at the economy’s heels. And no-one seems especially happy.

Fed Chairman Ben Bernanke is undergoing a “trashing … by people who think the Bernanke Fed has eased too much, and those who think it has eased too little,” said Ethan Harris, an economist at Lehman Brothers.

Bernanke and his colleagues have already lowered benchmark overnight rates by a cumulative 2-1/4 percentage points to 3 percent since mid-September. Tuesday’s meeting comes exactly six months to the day from when they began chopping rates.

Forecasters, however, have turned increasingly gloomy on the economy in the past few weeks after a second monthly drop in employment, further signs of a consumer retrenchment and a financial crisis that led the Fed to throw a lifeline to Bear Stearns, the fifth-largest investment bank, on Friday.

In February, San Francisco Federal Reserve Bank President Janet Yellen warned a “negative feedback loop” could ensnare the economy 24 hour payday advances. That fear may have been realized.

“Conditions have the potential to supercharge the increasingly visible self-feeding downturn in the real economy,” Citigroup economist Robert DiClemente said.

Now, the only question seems to be the degree to which lingering inflation worries temper the central bank’s move. 

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