Efforts by the Federal Reserve to restore order to financial markets are about to enter a new and potentially dangerous phase.

The Fed is expected to cut US interest rates by 75 basis points to 2.25 per cent, following its recent, more aggressive policy moves to improve liquidity conditions. There re-mains a clear possibility that interest rates will only be reduced by 50 basis points as policymakers attempt to evaluate the impact of their earlier efforts to restore confidence to financial markets.

Joachim Fels of Morgan Stanley says the Fed is about to enter a new phase in the easing of monetary policy that will take real interest rates below zero. This would be achieved with a 75 basis point cut. Morgan Stanley forecasts a further 50 basis points reduction to 1.75 per cent in April and rates to then remain on hold for the remainder of 2008.

Mr Fels says this marks the start of a new global liquidity cycle in which the combined but not necessarily co-ordinated efforts of central banks should lift growth and asset prices in 2009. However, the clear danger is that easier monetary policies will cement a new regime of higher global inflation, undoing years of hard work by policymakers to anchor price stability and inflation expectations.

The US housing market has yet to show convincing evidence of stabilising. The National Association of Home Builders activity index for March, due out today,  is expected to remain un-changed at 20, only slightly above December’s record low of 18. US February housing starts, due on Tuesday, are expected to fall from 1.01m in January to 995,000.

The deepening slowdown in the US economy will be evident in industrial production, expected to contract in February and the year-on-year growth rate forecast to slow from 2.3 to 1.4 per cent.

In the UK, February consumer price inflation data are expected to show an ugly jump from 2.2 per cent in January to 2.6 per cent, due mainly to recent increases in household gas and electricity prices. With consumers’ inflation expectations at their highest levels since records began in 1999, the Bank of England faces clear risks if it decides to cut interest rates further.

However, money markets expect further rate cuts this year and the minutes of the Bank’s March meeting, due on Wednesday, should clarify whether assumptions about a reduction in April or May are realistic.

Amid growing concerns about the outlook for consumer spending, February retail sales, due on Thursday, are expected to show year-on-year growth slow to 3.9 per cent in February.