Even after the second rate cut in six weeks, some economists say the Federal Reserve is moving too cautiously to head off a serious economic downturn.
"They haven't yet done enough. Whether they've acted soon enough is the $64 question," said Gary Schlossberg, senior economist at Wells Fargo Bank, San Francisco.
"The Fed is to some extent gambling that the economy, while weak, is not getting dramatically weaker and that they still have the leeway to move cautiously," he said.
The problem is that neither the Fed nor anyone else knows the true pulse of the economy, especially with recent delays in data gathering prompted by two partial shutdowns of the federal government.
"It seems clear that the economy was struggling, even before bad weather in January," Mr. Schlossberg said. "And real interest rates remain high."
Alan D. Levenson, money market economist at UBS Securities, New York, thinks the Fed must cut rates another full percentage point by this summer to reach the monetary neutral zone.
"Sustained growth is the desired, neutral outcome, and you need neutral monetary policy to get it," he said. "With a 3% inflation rate, we think that means a 4.25% federal funds rate."
The funds rate - the overnight rate for interbank loans - stands at 5.25% after the central bank's quarter-point cut last week.
"If they do drag their feet, they will increasingly risk being in error," the economist said. "Those errors are called recessions."
Mr. Levenson and UBS chief economist Paul A. McCulley now rate the probability of recession at only 25%, assuming the Fed cuts rates steadily.
Ideally, they think the Fed should push through half-point rate cuts in each of the first two quarters of this year and follow up with another quarter-point cut next summer.
That would require rate cuts at each meeting of the central bank's policymaking Federal Open Market Committee during the next six months. The meetings are set for March 26, May 21, July 2, and Aug. 20.
If the inflation rate falls further, Mr. Levenson noted, the Fed would have to push the nominal fed funds rate lower to achieve neutrality.
Indeed, Mr. Levenson and Mr. McCulley expect inflation this year to fall further. "The Fed's December rate cut," said Mr. Levenson, "simply kept the real funds rate from going above 3%."
"Clearly, tight credit policy is where you have the real funds rate above the potential economic growth rate," he said. "That's where we are right now."
Fed Chairman Alan Greenspan has said 2.5% is a sustainable, noninflationary growth rate for the economy. Few expect the economy to do better this year.