When does a crisis become a calamity?

By Ros Krasny - Analysis

CHICAGO (Reuters) - Financial markets are convinced that a Federal Reserve rate cut must come soon in order to help stem the global liquidity crisis, but many economists feel major hurdles stand in the way.

The biggest open question is whether Fed policy-makers believe that the financial crisis has spread beyond Wall Street to the so-called real economy. Recent signs have been inconclusive outside of housing, where a recession already rages.

In Fed-think, what constitutes a true calamity?

St. Louis Fed President William Poole was the first policy-maker to speak since the mortgage and general credit market crisis worsened late last week.

Poole said in an interview on Wednesday with Bloomberg TV that only a "calamity" would justify an interest-rate cut now, and that "no one has called up and said the sky is falling."

"It's premature to say that this upset in the market is changing the course of the economy in any fundamental way," Poole said, adding that the Fed would have to rely on some real evidence before making a move.

Marc Chandler, chief global currency strategist at Brown Brothers Harriman in New York, said: "That evidence is not just lacking, but the data over the past week or so suggests that the U.S. economy was a bit stronger than previously thought going into August."

Short-term interest rate futures fully price a potential quarter-percentage-point cut in benchmark lending rates in September and a strong chance the Fed will cut rates by a half point at that point. Prospects for an inter-meeting rate cut are also running high.