A Full Point for Bernanke & Co.?

How much will the central bank cut rates at its Mar. 18 meeting? Here's a roundup of what some Wall Street economists and strategists expect

From Standard & Poor's Equity Research

Amid turmoil in credit markets and signs that the U.S. economy is slipping into recession, Federal Reserve policymakers meet on Mar. 18 to make a fateful monetary policy decision, with market speculation swirling around whether the central bank will cut the fed funds rate target by 75 or 100 basis points. Here's what Wall Street economists said on Mar. 17 about what they think the Fed will do, as compiled by BW and S&P MarketScope staff:

Challenging Times

Tobias Levkovich, chief U.S. equity strategist, Citigroup (C)

The credit crisis and its aftermath seem to have claimed its biggest victim [with] Bear Stearns (BSC) collapsing into the arms of JPMorgan Chase (JPM). The counterparty risk issue, which developed both rapidly and meaningfully, forced the New York Fed to come in and provide stability through JPMorgan. Yet we suspect that investors remain fearful that other weaker securities firms could follow this path, with extreme concern over financial institutions now. With the very strong likelihood of even more evidence of recessionary conditions and likely forthcoming declines in domestic industrial activity due to credit pressures, we expect earnings to fall year over year in coming quarters, but sell-side consensus numbers remain too optimistic.

Also, given recent currency appreciation and commodity price developments, some weakness out of Europe and Japan should be expected as well. Soaring commodity prices and international wage pressures as well as a depreciating currency arguably causing imported inflation have led many investors to assume that the Fed will be stymied by CPI [consumer price index] data, though domestic wage pressures could fade quickly alongside employment declines. Thus, Citi's economists predict the Fed will trim the fed funds rate by 100 basis points this week, following [the Mar. 16] discount rate cut.

The "Lender of Last Resort"

Michael Englund, chief economist, Action Economics

Financial market turmoil since Friday [Mar. 14] was exacerbated by Fed action over the weekend, and these developments are consuming the market's focus, despite some dynamic swings in much of the U.S. economic data released [Mar. 17]. The change in the lending facility to include nondepository primary dealers signals a widening of Friday's instability, as does the reduction in the discount rate.

We now expect a jumbo Fed easing this week to help ease the heightened degree of panic in the markets, which was likely only exacerbated by the very weak Empire State headline figure and the February drop in industrial production.

For the Fed, the focus has shifted form broad monetary policy considerations to the more immediate "lender of last resort" role for the central bank, and we assume that the Fed will do what it thinks is necessary to achieve market stability. Our assumption for now will be a 100-basis-point easing, though it's certainly hard to calibrate what would strike each FOMC member as necessary. Presumably the Fed will see futures pricing as a useful gauge, and these prices are dancing around expectations of just more than 100 basis points of easing.

Data Consistent with Recession Theme

John Ryding, chief U.S. economist, Bear Stearns

Even before the latest stresses of the financial markets hit, we think the economy had fallen into a technical recession, and these data remain consistent with this theme. With the velocity of events picking up markedly since the middle of last week, we expect the Fed to cut the funds rate by 100 basis points [on Mar. 18] (a call we adopted on Friday [Mar. 14]) in addition to the funding facility that was announced for primary dealers. Although the details of the New York Fed Empire State index report do not fully corroborate the weakness in the headline index, this report is consistent with our recession and inflation themes.