Federal Reserve policymakers face tough choices as they debate interest rates amid rising recession risks, concerns about inflation and a “bailout” of real estate speculators, the Associated Press reported.

The Federal Open Market Committee, which meets tomorrow, is widely expected to respond to the worst housing slump in decades, which has led to rising mortgage defaults and a tightening of credit standards that threatens the overall economy.

A growing number of analysts say they expect the FOMC, which has held the federal funds rate at 5.25 percent since June 2006, to cut the benchmark rate by 25 or 50 basis points.

Of key importance is the message sent to financial markets. Federal Reserve Chairman Ben Bernanke wants to ease economic stress while averting a return to easy-money conditions that, according to some critics, fueled the real estate boom-bust cycle.

“The Fed does not want to cut the fed funds rate, but it may well be forced to because of the inevitable slowdown in U.S. economic activity arising from the subprime-induced credit crunch,” said Sherry Cooper, chief economist at BMO Nesbitt Burns, in a note to clients.