Rudy Narvas, a Fed watcher and macroeconomist at 4Cast, said Bernanke will likely drop some hints on monetary policy, as far is his evolving views on inflation are concerned, but that it would be premature to signal a definite cut at the next meeting.

Narvas said the Chairman will likely lay out the Fed's plan to focus on liquidity measures, and keep that distinct from monetary policy. He added that the Fed isn't likely to call an emergency meeting to slash interest rates, as there is no guarantee it would do anything to ease credit conditions, even though markets are pushing for it.

Ellen Zentner, senior macroeconomist at the Bank of Tokyo-Mitsubishi, said it would be possible for the Fed to cut rates in an emergency meeting, but it's unknown what the timing would be based on. She said the Fed has access to the FDIC list of banks that are in trouble - which she said is why Bernanke and Paulson spoke of "dire consequences" if the bailout package doesn't succeed - and with that information they could pre-empt a possible bank failure with a surprise announcement.

For the moment, the Fed would prefer to wait and see how their other liquidity measures work out, Narvas added. Then, at the end of the month, they can review the situation and decide to cut rates if necessary.

Zentner said it's typical for the Fed chief to avoid giving away any clues to the direction of FOMC policy. "He'll skirt any talk on monetary policy and whether it's accommodative or not," she said, adding that Fed Funds Futures are giving more than a 50% chance of a rate cut on Oct. 29.

Zentner said the Treasury's Emergency Economic Stabilization Act won't have any impact until four to six weeks from now, which is at least a week after the presidential election. If the Fed thinks it is necessary, they could attempt to stave off panic by acting aggressively. But a rate cut now gives the Fed less room to act later on, she added.

Based on the 2001 recession, economists look at the floor of the target rate to be 1.00%. Zentner said the Fed could "absolutely" go lower than that - all the way to 0% - if they deem it necessary. However, she noted that rate cuts "have had little effect on the economy" in recent years, which is why the Fed has stepped it up with liquidity injections via the auction facility to get credit markets moving again.

Bernanke's most recent public comments were after the House approval of the Treasury's rescue package on Oct. 3. "The legislation is a critical step toward stabilizing our financial markets and ensuring an uninterrupted flow of credit to households and businesses," said the Fed chairman.

He also gave a hint that the Fed could inject more liquidity or possibly cut rates. "We will continue to use all of the powers at our disposal to mitigate credit market disruptions and to foster a strong, vibrant economy," Bernanke said.

On Sept. 29, Bernanke said the Treasury bill was necessary not just for Wall Street, but for taxpayers. "This legislation should help to restore the flow of credit to households and businesses that is essential for economic growth and job creation, while at the same time affording strong and necessary protections for taxpayers," he said.

By Patrick McGee, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Nancy Girgis, This email address is being protected from spam bots, you need Javascript enabled to view it

CEP Newswires - CEP News © 2008. All Rights Reserved. www.economicnews.ca

The Copying, Broadcast, Republication or Redistribution of CEP News Content is Expressly Prohibited Without the Prior Written Consent of CEP News.

A copy of CEP News disclaimer can be found at http://www.economicnews.ca/cepnews/wire/disclaimer.