Fed Eyes Another Easing

Against the backdrop of U.S. Treasury Secretary Henry Paulson's mortgage fix, the only mystery surrounding the Federal Reserve's meeting Tuesday is how much the central bank will cut rates.

The administration finally revealed its outline to avoid further home-price declines last week, but persistent seizures in the credit markets showed that banks are still facing a liquidity crunch. In light of the housing market's need for surgery, along with recent turmoil in the financial system, the central bank may follow the government's lead and err on the side of extra stimulus next week.

That means a 50-basis-point rate cut is a possibility, say some economists. The fed funds futures market is pricing in 100% odds of a 25-basis-point cut next week and 28% odds of a 50-basis point cut, which would bring the fed funds rate to 4%. The Fed has cut rates by 0.75% over the past two meetings of the Federal Open Market Committee. The futures market is also pricing in two more 25-basis-point cuts at the Fed's January and March 2008 meetings. ...