Federal Reserve policy-makers began meeting on Tuesday against the backdrop of a still-plummeting U.S. housing market that is sapping consumer optimism and may require more interest-rate tonic.
The U.S. central bank's Federal Open Market Committee began a two-day meeting at 2 p.m. with futures markets betting that it will announce a quarter-percentage-point cut in rates at about 2:15 p.m. on Wednesday.
That would be on top of a surprise half-point reduction the Fed made on September 18 to its trend-setting federal funds rate for overnight loans between banks and would bring the key rate to 4.5 percent, its lowest since March 2006.
There was a only a slight doubt in financial markets on Tuesday whether policy-makers would cut rates on Wednesday, with futures markets pricing in more than a 90 percent chance for a small reduction.
Another dose of bad news on housing on Tuesday morning helped dissipate lingering doubts on rate cuts.
The Standard & Poor's/Case Shiller national home price index showed prices in 10 major metropolitan areas fell 0.8 percent in August -- a reminder of the deep housing-sector slide that policy-makers say is a key risk to the economy.
The report showed home prices were down 5 percent from year-ago levels, the biggest year-over-year decline since June 1991, just after the 1990-91 recession ended.
Not surprisingly, separate data on Tuesday from the Conference Board showed consumer confidence tumbled for a third straight month in October, reaching a two-year low.
"Further weakening in business conditions has, yet again, tempered consumers' assessment of current-day conditions and may very well be a prelude to lackluster job growth in the months ahead," said Lynn Franco, director of the Conference Board's consumer research center.
During the two-day meeting, in which the Fed may also resume a discussion on potential changes to their communications policy, officials will get a reading on third-quarter economic growth, which should at least assure them that a precipitous decline in activity has not taken hold.
Economists surveyed by Reuters predict that gross domestic product figures on Wednesday morning will show the economy expanded at a 3 percent annual rate in the third quarter. That will be only a moderate easing from the 3.8 percent growth in the second quarter, although a steeper slowing is expected in the final three months of the year.
The expected fourth-quarter softness puts a burden on Fed Chairman Ben Bernanke and his colleagues to meet their test of sustaining a noninflationary expansion at time when a housing downturn and credit-market strains are weighing heavily.
In a speech on October 19, Bernanke said that during times of stress, policy-makers must be prepared to counter uncertainty by acting boldly with measures to ward off a worse situation.
"Intuition suggests that stronger action by the central bank may be warranted to prevent particularly costly outcomes," Bernanke said -- words that would echo the thoughts of many of those on Wall Street.