Fed may still consider half-point rate cut

"Banks are pricing in more risk for loans to each other, mortgage defaults are up, banks are getting downgraded by research firms and brokers...these are not slow-growth signs," Wang said.

On the heels of the housing sector's correction and the surge in subprime mortgage and related asset defaults, the Fed has cut benchmark interest rates twice, starting in September 2007. The Fed Funds rate, the rate banks charge each other, now stands at 4.50%, and the discount rate, the rate the Fed charges banks for short-term loans, is at 5.00%.

Fed out there alone?

Another item supporting the "half-point cut" argument is the limited impact of the Bush administration's proposed subprime mortgage package, as currently outlined, Wang said. The package "is likely to address only about 600,000 of the estimated 2 million at-risk subprime loans," he said, and mortgage defaults are likely to increase again in 2008 as a result, implying a substantial contraction effect on the economy.

That fact, combined with no guarantee of a separate fiscal stimulus package in Q1 2008 due to divided government (Democratic party-led Congress vs. Republican party-led Executive branch), creates a distinctly likely scenario of the U.S. Federal Reserve flying solo regarding economic stimulus, for the considerable future.

"If the Fed concludes that it is going to be out there alone, regarding stimulus, that may affect their monetary policy decision Tuesday, and it supports the argument of those who say a half-point interest rate cut is reasonable," Wang said.