U.S. & World

WASHINGTON (CBS) ― Urgently trying to keep cash flowing amid a Wall Street meltdown, the Federal Reserve on Tuesday pumped another $70 billion into the nation's financial system to help ease credit stresses.

The Federal Reserve Bank of New York's action came in two operations in which $50 billion and then another regularly scheduled $20 billion were injected in temporary reserves.

The maneuver takes place as Federal Reserve Chairman Ben Bernanke and his central bank colleagues prepare to meet to decide their next move on interest rates and conduct a fresh assessment of the country's financial and economic troubles.

Economists were split on whether the central bank would actually cut a key rate when officials meet Tuesday, but it was widely agreed that the Fed will at least open the door to reducing rates in the weeks ahead if financial markets do not stabilize.

In the last few days, the American financial system has been badly shaken as bad bets on dodgy mortgage-backed securities claimed more Wall Street giants.

Lehman Brothers, the country's fourth-largest investment bank, filed for bankruptcy protection. A weakened Merrill Lynch, deciding it couldn't go it alone anymore, found help in the arms of Bank of America. Now, the insurance giant American International Group is struggling as major credit rating agencies issued downgrades for the company.

Against this backdrop, Wall Street on Monday plunged 500 points, the most since the September 2001 terror attacks.

The cash infusion Tuesday was designed to help ease a spike in the overnight lending rate between banks. A sharp rise in such borrowing costs makes banks reluctant to lend to each other and to hoard cash, worsening already tight credit conditions. Harder-to-get credit has crimped spending by consumers and business, a factor in the slowing economy.

To help grease the financial plumbing Monday, the Fed pumped a total of $70 billion into the system through open market operations.

The Fed announced Sunday that it was expanding its efforts to supply more cash to the financial system as a way of helping other financial firms that might be facing problems in the wake of the Lehman bankruptcy filing.

However, many economists believe the effort will end up not being enough to calm markets. For that reason, they say the chances of a Fed rate cut - most likely occurring between meetings - has risen. Another factor that might influence the Fed is the recent jump in unemployment, which surged in August to a five-year high of 6.1 percent as companies shed another 85,000 jobs.

"Looking back to the '70s, over the last five recessions, the Fed has pretty much slashed interest rates until the unemployment rate has peaked each time," said Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi.

David Jones, an economist at DMJ Advisors, said he believes the Fed will signal that it is now more inclined to cut rates than to raise them but will stop short of actually cutting rates.

"I believe they will say that the financial crisis has greatly increased the downside risks to growth and those risks now far outweigh the risks of inflation," he said.

The central bank has gotten some good news on inflation recently with the sharp fall in oil prices with crude closing below $100 per barrel on Monday for the first time in six months.

That big decline in energy prices helped trigger the largest drop in wholesale prices in nearly two years in August and economists believe that a report to be released Tuesday will also show that consumer prices dropped in August.

The Fed started a year ago with an aggressive effort to cut interest rates, pushing the federal funds rate down from 5.25 percent to 2 percent, where it has been since the Fed's last rate cut in April.

(© 2009 CBS Broadcasting Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.)