Fed can’t stop recession

Even if the central bank starts to cut rates aggressively, many of the risks for the U.S. economy are beyond its reach.

By Chris Isidore, CNNMoney.com senior writer


NEW YORK (CNNMoney.com) — Problems in housing, the financial markets and the first job decline in four years have made a Federal Reserve rate cut next week all but certain. But it has also raised talk about a recession — and whether the Fed is able to prevent one.

While most economists still don’t believe the nation will fall into a recession, there is general agreement that the economy now faces a greater risk than there was only a month or two ago.

It's not clear how much Federal Reserve Chairman Ben Bernanke will be able to do if the U.S. economy does start to slide towards recession.
It’s not clear how much Federal Reserve Chairman Ben Bernanke will be able to do if the U.S. economy does start to slide towards recession.

Problems in the financial credit markets are only part of the risk faced by the U.S. economy.
Problems in the financial credit markets are only part of the risk faced by the U.S. economy.

But many economists also say that the Fed can do little at this point to address many of the factors threatening continued economic growth. Some economists even argue that rate cuts could make matters worse.

The mortgage market would seem to be where the Fed could have the most effect. Most directly, a rate cut will reduce the rates for adjustable rate mortgages, one of the types of loans that has caused the problems for lenders and subprime borrowers, those with less-than-perfect credit.

An estimated 2 million homeowners face sharply higher mortgage payments when their current loans reset over the next year. So a Fed rate cut could possibly stave off a wave of foreclosures.

That’s key since more foreclosures could have the potential to hurt consumer spending as a whole, said David Wyss, chief economist for Standard & Poor’s.

Why the credit crunch may deepen

Read more

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