Eyes on Bernanke: Fed chief, reluctant to cut rates, may end up doing so anyway

All eyes are on Federal Reserve Chairman Ben S. Bernanke and his colleagues today and Wednesday, anticipating another interest-rate cut to bolster the faltering U.S. economy.

Meanwhile the Fed chieftans collectively sound as if they'd prefer to just say no to an interest-rate cut this week.

Policymakers from Bernanke on down have avoided signaling they want to reduce benchmark lending rates at their meetings, which begin today and Wednesday — ever since lowering them by a larger-than-anticipated half percentage point in September. Instead, Fed officials have stressed how uncertain the outlook is and, in words Bernanke used twice in a single week, how "challenging" it is to make policy.

Traders don't agree. They consider the chances of a rate cut this week as a cinch, judging from federal funds futures prices at the end of last week. If the Fed disappoints them, it risks upsetting still-fragile markets and hurting the economy.

Bill Gross, manager of the world's biggest bond fund, said the Federal Reserve may eventually have to reduce interest rates down to 3.50 percent to avoid a further contraction in lending, according to a commentary posted on Pacific Investment Management Co.'s Web site.

"The Fed is reluctant to ease," says Louis Crandall, chief economist at Jersey City, New Jersey-based Wrightson ICAP LLC, a unit of ICAP Plc, the world's largest broker for banks and other financial institutions. "But it also doesn't want to unsettle the financial markets unnecessarily."

The likely rationale if the Fed cuts: a desire to prevent the worst case, in which renewed market tumult, rising oil prices and falling home values drive the U.S. economy into recession.

The Fed, though, may combine such a move with an open-ended statement that doesn't promise further cuts. Its goal would be to dissuade investors from anticipating a series of reductions, an outlook that could further weaken the dollar and revive inflation concerns.

"They'll use the statement to try to temper expectations of further rate cuts," says Michael Feroli, a former Fed economist who is now with JPMorgan Chase & Co. in New York.

Speculation about what the Fed will do this week has swung widely since the central bank cut its target for the federal funds rate — the rate banks charge each other for overnight loans — to 4.75 percent from 5.25 percent on Sept. 18.