WASHINGTON - The Federal Reserve is primed to aggressively cut a key interest rate even lower today, racing to contain spreading financial fires that threaten an economic meltdown.
President Bush declared "we're in challenging times" and huddled Monday with top economic officials - including Fed Chairman Ben Bernanke, Treasury Secretary Henry Paulson and Securities and Exchange Commission Chairman Christopher Cox.
On Wall Street, the Dow Jones industrials, in an erratic session, closed up 21.16 points, after having plunged nearly 200 points early in the day. The broader Standard & Poor's 500 and Nasdaq composite indexes ended lower as investors bailed out of investment banks and small-cap stock.
With the quick collapse of the investment bank Bear Stearns, fears are mounting about whether other financial companies may fall. Many believe the country has already sunk into recession and all the problems - if not contained - will deepen and prolong the pain.
"The Fed is on high alert - something you don't see but once every quarter century; maybe, in this case, since the Great Depression. This is a very unusual period," said Mark Zandi, chief economist at Moody's Economy.com.That's because the Fed is having to fight multiple battles at the same time: a housing collapse, a severe credit crunch and Wall Street turmoil that threatens the stability of the entire U.S. financial system. All those problems feed on each other, creating a vicious cycle that can be hard for the Fed and other Washington policymakers to break. The weight of those troubles is like a millstone on the ailing economy.
"Now the issue is fighting the deeper recession," said Brian Bethune, economist at Global Insight. "It has kind of moved to another level. The fires are spreading," he said.
Bernanke and his colleagues may ratchet down a key interest rate, now at 3 percent, by as much as a full percentage point, to 2 percent, which would put that rate at the lowest it has been since late 2004. Because that rate affects a wide range of rates charged to millions of consumer and businesses, it is the Fed's most potent tool for reviving economic activity.
If that happens, commercial banks' prime lending rate on certain credit cards, home equity lines of credit and other loans would drop by a corresponding amount to 5 percent, from 6 percent currently. The Fed's goal, since embarking on a rate-cutting campaign in September, is to induce people and businesses to boost spending, thus bolstering the economy.
However, with the panicky mind-set that has swept over investors since last summer, credit - even at a lower cost - has become harder and harder to get as financial institutions, which racked up huge losses due to soured investments in mortgage-linked securities, became increasingly wary of lending and hoarded cash. So the Fed took a series of other unconventional maneuvers to deal with those problems and to restore confidence.
The Fed, in a bold action on Sunday, agreed for the first time to let big investment houses get emergency loans directly from the central bank.