A Federal Reserve interest rate cut would be a tonic for ailing financial markets, but the central bank seems to be in no hurry to provide the medicine.
The Federal Open Market Committee, which sets monetary policy, does not meet again for four weeks, on Sept. 29. Fed Chairman Alan Greenspan, who is vacationing, could convene a telephone meeting but is unlikely to do so short of a crisis.
"He can't be seen as bailing out the stock market. Not the guy who a couple of thousand points ago said it was overvalued," said Nicholas S. Perna, chief economist at Fleet Financial Group.
Mr. Greenspan offered his famous and controversial remark about the "irrational exuberance" in stock prices in December 1996. The Dow Jones industrial average was just above 6,400 at the time, versus 7,700 now.
"A very interesting moral hazard question arises," said Mr. Perna. "What if stock investors believe the Fed is going to come to their rescue anytime there is a bear market?"
"After the 1987 market crash, the Fed said it was prepared to provide liquidity. If it cuts rates now, is there really any difference from the moral hazard connected with emerging-nation loans?" he asked.
From Mr. Greenspan's point of view then, Mr. Perna said, "the bull market has taken a hit without the Fed having to raise rates." If the nation's economy is slowed down a bit, so much the better.
Nevertheless, Mr. Perna thinks the Fed is indeed going to cut rates - and by more than he earlier thought. While futures markets currently signal a half-percentage-point cut in the 5.5% federal funds rate, the economist said he believes a full-point decline may be coming.
Mr. Perna said that could happen over the next six months in two to four separate Fed moves. His expectation is based on his own forecast for a slower economy and even lower inflation.
Other economists also think the Fed will act soon, with the troubled international scene as a backdrop.
"Right now global economic instability is spreading like wildfire, and that will affect the U.S. economy adversely," said Sung Won Sohn, chief economist at Norwest Corp. "At this point global recession and global deflation are the concerns."
"One thing we can do is cut interest rates to help stabilize global financial markets," he said. "And there are good economic arguments. Inflation is not going to get out of control any time soon."
The Norwest economist said he thinks the Fed may begin easing at the late September meeting, perhaps earlier. "I am not predicting that, but I certainly hope so. I think it would be desirable to do so."
Other economists are also calling on the Fed to begin easing.
"Please ease now!" said Edward Yardeni, chief economist at Deutsche Bank Securities, New York. With inflation steadily falling, he said, the real federal funds rate has in fact been rising and is now at its highest since the beginning of the decade.
Economists at Credit Suisse First Boston asserted that "it is time for the monetary authorities to contradict the systemic collapse of confidence now unfolding. The Fed and its counterpart in Europe should explicitly state that they stand prepared to ease rates and provide liquidity, as and when necessary."