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How Many Bullets Does Bernanke Have Left?

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What are the next steps the Fed and Treasury will take to deal with credit crunch? Is an emergency rate cut coming?

With no let-up in market turmoil in sight, some analysts say the Fed has no choice but to issue an emergency rate cut.

Lou Crandall, chief economist at Wrightson ICAP and a well-known money market watcher expects the Fed to cut rates 50 basis points this month to 1.5 percent and thinks Bernanake could pull the trigger this week. "If the Fed is ready to implement its new authority quickly, and if it expects to lower its funds target at some point this month anyway, it would probably combine the two in a single announcement," Crandall says.

Meanwhile, others are looking for a coordinated interest rate cut by the Fed, the ECB and the Bank of England. The world's major central banks have already been offering almost constant cash injections to jittery markets and pundits such as London economist Howard Archer suggest it’s a logical next step.

CNBC’s Steve Liesman, however, sees the situation a little differently. He thinks instead of rate cuts the Fed might be looking at creative and different things.

“As far as the Fed is concerned it will expand the liquidity in the market almost infinitely,” says Liesman. In other words the Federal Reserve is a bottomless pit of money. ”One of the things that Fed is trying to do by putting all that liquidity out there is to make banks more comfortable with one another.”

”Also I don’t think investors understand the broad powers of the Treasury which could include direct injection of capital into companies,” Liesman adds. In fact Liesman spoke with Rep. Barney Frank who confirmed the option.

The Bottom Line: Don’t count the Fed short when it comes to distressed assets They have other options aside from lowering rates. They can do reverse auctions, direct purchases of bad assets or the Treasury can go right into companies and inject capital.

We'll be watching.



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