NEW YORK -- Maybe today, maybe Monday, almost certainly within the very near future, the Federal Reserve will begin trying to push down interest rates.
That forecast is being made so uniformly among economists that it can safely be called a consensus. A related development is that for the first time in eight years, the broad array of economists polled by Blue Chip Economic Indicators believes the United State is in a recession, resulting in the need for the Fed to use a monetary stimulus.
A decision to lower interest rates is thought to have been made Tuesday at a meeting of the Federal Reserve Board's Open Market Committee, when the senior governors are thought to have been presented with information confirming that the economy had stalled.
Market intervention, undertaken by the New York Fed at Washington's behest, typically comes several days after such a meeting.
So much for the general expectations. After that, the consensus breaks down, with many questioning whether any action on rates will succeed, whether it will restart the economy if it does succeed, and when the benefits will be seen if the answer to both of those questions is positive.
At the core of the debate is how a simple and concrete notion such as money becomes highly complex and theoretical when tied to a broad economy.
The optimistic scenario is premised on the notion that a reduction in short-term rates, which the Fed can control through a number of means, will affect other matters not directly under Fed control, namely longer-term rates, the extension of credit and the increase in business activity.
Though any improvement will occur with a lag, it will still gradually pervade the entire economy. Money will be used to make money. Businesses will buy capital equipment; consumers will buy homes, cars and apparel; and each of those will stimulate still more consumption and investment.
A pessimistic view is that the Fed no longer has a monetary option, that it can't create this multiplying form of money because the faith and physical structure to do so have both been damaged. It can merely create currency, this view goes, an essential but limited form of money that may go under a mattress or overseas but in either case would do little to stimulate further domestic economic growth.
There are two arguments typically used to support this bleak scenario. The first holds that the Fed might lower interest rates but that it won't matter because banks won't lend. Rates might come down in coming weeks, suggesting the successful implementation of policy, but businesses will be financially starved, and the economy will continue to contract.
The cause is the dismal condition of bank balance sheets. The money centers in particular have had huge write-offs, first from Latin American debt, more recently from real estate. The other pessimistic argument is that the Fed will succeed in lowering rates in the near term but in doing so will merely depress the dollar, restoke inflation and ultimately drive long-term rates even higher. If there is any underlying trend to these forecasts, it is that the pessimists tend to be concentrated in the Northeast, where the economic crunch has been most severe, and the optimists tend to be in Southeast and Midwest, where conditions have been milder.
Chicago-based economist William Hummer, after receiving Sterling National Bank & Trust Award's award for accuracy in forecasting earlier this week, predicted that a recession would be mild, concluding by the end of next year.