The Fed's policy-setting panel, however, said on August 17 that tighter credit conditions had "appreciably" raised the risk that the economy could stumble badly.
Just last month Federal Reserve Bank Chairman Ben Bernanke pledged assistance from the Fed as needed to protect the overall economy beset by the drop in the housing market as well as volatile credit markets poised to panic in the face of the large increase in mortgage delinquencies and defaults.
How much of a drop in the rates one can expect is up for discussion. Recently, interest rate futures markets found that investors anticipated as much as a half-percentage point cut in the overnight federal funds was more likely than a quarter-point reduction, although both forecasts have their followers.
The Fed last reduced the benchmark federal funds rate in June 2003, in the last of 13 reductions that took place over a two and a half-year period, ultimately reaching borrowing costs at a low of 1 percent, a rate not seen since 1958.
Weighing in with his opinion, former Fed Chairman Alan Greenspan said Bernanke's Fed faces more risks from inflation now than he did during the 2001-2003 repetitive rate-cutting days. Says Greenspan, “We could ease without fear of stoking inflationary pressures." However, he cautions, “We couldn't do that in today's environment."
Last month, the Fed lowered the discount rate that governs direct Fed loans to banks in an attempt to shore up wary creditors’ confidence.