The Federal Reserve holds its last meeting of 2007 on Tuesday and is expected to announce a cut in interest rates of 25 basis points (a quarter of a percentage point).
The cut would be a reversal of the Fed's earlier movement; at the end of October, it signaled that it didn't expect to cut rates again soon.
"They've clearly changed their mind," David Wessel, economics editor at The Wall Street Journal, told Steve Inskeep, noting the repeated hints from Fed Chairman Ben Bernanke and Vice Chairman Don Kohn that a rate cut is imminent.
"What they're seeing is great concern about how the financial markets are functioning, particularly the unwillingness of banks to loan to other banks."
That can result in higher short-term interest rates, Wessel says — those for loans of 1-3 months.
And there can be other fallout from such reluctance, too.
"If they won't lend to each other," Wessel said, "imagine how they're going to look at lending to you or me."
One of the problems, according to Wessel, is that banks trust each other less, fearing that their colleagues may be tied to the subprime mortgage crisis.
Another issue: Economic uncertainty may be motivating bank officials to keep their money liquid — partly so that their end-of-year results aren't placed in any danger.
A rate cut, Wessel says, could "make borrowing cheaper for people and offset some of the other problems that are going on in the economy."
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