He believes that the Fed may wind up cutting rates by another half a percentage point, to 1.5 percent, but not until later this year or early next year.

"They are trying to buy time for the economy to lick its wounds and recover," he was quoted as saying by The Wall Street Journal.

Federal Reserve chief Ben Bernanke has warned that the U.S. economy continues to face "numerous difficulties", including persistent strains in financial markets, declining house prices and rising costs of oil and food.

"The U.S. economy and financial system have confronted some significant challenges thus far in 2008," said Bernanke in a written testimony to the Senate Banking Committee on Tuesday.

"Accurately assessing and appropriately balancing the risks to the outlook for growth and inflation is a significant challenge for monetary policy-makers," the central bank chairman noted.

Bruce McCain, chief investment strategist at Key Private Bank, an arm of KeyCorp in Cleveland, said the Fed does not look like they can drop interest rates much further.

"A big part of what the Fed is able to do for the economy, theyhave already done," he said.

To shore up the battered housing market, one Treasury official said they are "turning over every stone looking for incremental ways" for assistance.