( Reuters ) - A long period of stasis in Federal Reserve monetary policy looks certain to end on Tuesday with a U.S. interest-rate cut, leaving the question of how much further rates may drop and how fast.
The rate-setting Federal Open Market Committee is tipped to lower its target for the overnight federal funds rate by either one-quarter or one-half percentage point from the current 5.25 percent, where it has been since June 2006.
Signs of economic trouble, capped off by a surprising drop in U.S. jobs in August, have opened the door for the Fed to deliver the rate cut so desperately wanted on Wall Street after a month of turmoil in global financial markets.
"The market is now increasingly focused on the economic fallout from the tighter credit conditions, which is tantamount to a tighter monetary policy," said Marc Chandler, chief global currency strategist at Brown Brothers Harriman in New York.
Indeed, prospects for a return to sub-par growth after a strong second quarter have even raised the specter of recession. While economists disagree on the probability of a downturn, they agree risks have risen.
The rate cut expected on Tuesday would be the first under the leadership of Ben Bernanke, the former Princeton University economist who took over from Alan Greenspan as Fed chairman in February last year.
Some analysts think the Bernanke Fed, whose approach to policy changes seems more deliberative and model-driven than the approach taken by Greenspan, is already behind the curve.
"Events are moving rapidly in a negative direction, and the Fed needs to get out in front of them," said Carl Tannenbaum, chief economist at LaSalle Bank in Chicago.