Federal Reserve Chairman Alan Greenspan has not said a word to suggest he has considered a cut in interest rates should the stock market rout begin to ring loud alarm bells about a double-dip recession.

But economists contend that the Fed chief must have such a game plan on his mind and could put it into action should a full-blown crisis emerge - like a huge one-day stock market sell-off or a freeze-up of financial-market liquidity.

"My best bet is the Fed isn't going to change rates at all this year," said Roger Kubarych, economic adviser for Hypo-Vereins Bank. But he predicted that if a change in rates comes this year, it is more likely to be a cut than a rise.

Just a few months ago, economists thought the Fed by now would be ratcheting interest rates up off their 40-year low of 1.75 per cent.

In testimony on Capitol Hill last week, Greenspan noted that the economy is vulnerable after shocks such as last year's recession and the recent stocks slide. He made clear that the prospect of higher borrowing costs is off the table for now.

He was mum about any prospect of easier monetary policy. Central bank observers said he was right to steer clear of a topic that might underscore worries about the economic outlook and could further upset investors.

But experts said the equity market sell-off could play out in such a way as to force the Fed to try to defend the economy against another downturn as it struggles to rebound from the 2001 recession.

Precedents for that type of emergency action include the 1987 stock market crash, the 1998 Asian and Russian global financial contagion and the waves of panic-selling that occurred after the September 11 attacks on the World Trade Centre.

Investors who have grimly watched huge losses accumulate in their stock portfolios may view the market performance as a catastrophe. But for the moment, those losses do not amount to enough of a catastrophe for the broad economy to justify a loosening of rates from their already low levels.

Major stock market indices are at multi-year lows and triple-digit one-day losses in the Dow Jones industrial average have become commonplace in the past few weeks.

After a 390-point sell-off on Friday, the blue-chip Dow Jones industrial average lost another 235 points, or three per cent, to end at 7,784, its lowest level since October 1998.

Yet credit markets are functioning normally and economic data so far depict an economy that is in an expansion mode, diverging sharply from the trends in the stock market.

"What we have now in the stock market is a slow bleed that never seems to cause a big crisis," said Ethan Harris, economist at Lehman Brothers in New York.

If the bleeding leads to a hemorrhage in which major indices lose more than 10 per cent in one day or if the market's woes begin to show up decisively in economic data, the Fed might rush to the rescue with a rate cut, he said. However, he said the odds of that are still less than 50-50.

The broad Wilshire 5000 index of US stocks has tumbled 26 per cent from its peak in late March, wiping out $3 trillion of household wealth, according to Harris's calculations.

A whopping $8 trillion in wealth has evaporated in the past two and a half years.

Such big declines will surely put a damper on the economy by depressing household spending. They have hurt confidence, according to recent data, but thusfar, consumers have continued to open their wallets. In June, retail sales rose 1.1 per cent overall and a smaller 0.4 per cent, excluding autos.

Greenspan said in a key August 1999 speech in Jackson Hole, Wyoming, that stock prices certainly are factored into the interest-rate equation.

"We no longer have the luxury to look primarily to the flow of goods and services, as conventionally estimated, when evaluating the the macroeconomic environment in which monetary policy must function," he said.

But Fed officials emphasise that even if they take stock prices into account, targeting equities is well beyond the scope of their job.

David Hale, global economist at Zurich Financial Services, said it would take one of three scenarios to push the Fed into action: a credit crunch or reluctance of bankers to lend, further confidence-crushing terrorist attacks or a stocks fall of 10-15 per cent in one day.

Neal Soss, economist at Credit Suisse First Boston, said interest rate cuts by the Fed would not be warranted unless market liquidity seized up severely - something he doesn't think will happen.

In the aftermath of the September 11 attacks that struck the financial nerve centre of the United States, the Fed made it clear it would take what steps were necessary to keep liquidity flowing in the financial system.

"The Fed's job is to be a lender of last resort when the markets are not functioning," Soss said. The markets are functioning well right now, he said but they are not moving in the direction policy makers want them to.

Soss said that points to a problem to be tackled, not by the Fed, but by the administration and Congress.

"If you want to cure the ills that the economy is facing, they are mostly issues for fiscal and regulatory policy, not monetary policy," he said.