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US Federal Reserve chairman Ben Bernanke is poised to make a second emergency cut in interest rates this week as the chaos from the sub-prime mortgage fiasco ripples through America's economy, exposing hundreds of thousands of families to the threat of losing their homes.
Wall Street investors are betting on a quarter-point reduction in borrowing costs at the Fed's two-day meeting this week, but with the news from the collapsing housing market worsening almost by the day, Julian Jessop, of Capital Economics, said Bernanke and his colleagues could even go for a half-point cut.
"I wouldn't rule it out. You can see a case for them saying, 'we need to get ahead of the curve'. Two weeks ago, it looked like they'd be able to keep rates on hold until December. Unfortunately, since then, the goalposts have moved."
The average price of existing homes has dropped by 6 per cent in six months, but analysts are warning that the worst is still not over for American homeowners.
Borrowers with shaky credit records and billions of dollars of loans are due to come off cut-price mortgage deals over the next 12 months, many of them facing a sudden increase in interest rates of up to three percentage points.
A Congressional committee warned last week that two million properties could eventually be repossessed.
At the same time, America's anxious consumers are contending with eye-watering petrol prices. The cost of a barrel of oil hit a new record high, above US$92, on Friday, and a growing number of investors were placing bets that the price would hit US$100 before the end of the year.
Tensions between the Turkish Government and Kurdish militants, and growing fears that Washington could be planning an attack on Iran, have helped oil prices to smash records repeatedly in the past month.
Oil-importing countries have demanded that Opec turn on the taps to bring prices back to normal; but there is little enthusiasm among the cartel for any more than the 500,000-barrel-a-day increase in output already announced.
Another reason for the jump in the oil price is the renewed slide in the dollar. The greenback has already broken through record lows against the euro, close to US$1.44, causing alarm in European capitals that eurozone exports will become impossibly uncompetitive in the world's biggest market.
Steve Barrow, currency analyst at Bear Stearns, said the dollar could slide further in the months ahead, as investors continue to lose confidence in the mighty US economy, and sell American assets such as corporate bonds.
He predicted that it could even hit US$1.50 before the end of the year.
"The jolt we have seen from the corporate credit market is very substantial. I don't see any sign of a turnaround."
Despite the continued woe on Main Street, equity markets ended last week in upbeat mood, with the Dow Jones up more than 100 points, after America's largest mortgage lender, Countrywide, said it expected to return to profit this quarter.
- Observer
