Like a banker walking the snowy streets of Davos in his dress shoes, the U.S. Federal Reserve may find it has a problem: traction.

The Fed's emergency rate cuts will help, but their very nature shows the extent of the challenge and the limited efficiency of the apparatus available to tackle it.

The U.S. central bank took the extraordinary step of cutting rates by 75 basis points to 3.5 percent, just a week before its regularly scheduled meeting.

But given the nature of the crisis -- a deflating debt bubble centered on real estate -- monetary policy will be slow to work and less effective than in most previous slowdowns.

In fact, the panicky impression given by the cuts, and the fact the market is already betting on another half a percentage point next week, tells the story of exactly how limited the Fed's options are.

There is a good chance they are pushing on much more of a string than they think, Stephen Roach, Morgan Stanley Asia chairman, told Reuters at the Davos summit of economic and business leaders.

We have two factors that triggered this recession, a decline in housing prices and the bursting of the credit bubble. Aggressive Fed action will not fix the impact of supply and demand which is pushing housing prices lower, and it's not going to return credit markets to their pre-crisis function.

Stock markets rallied after the Fed's move, the largest cut in rates in many years and the equivalent of taking rates down by a fat 18 percent.

But with house prices in the United States falling, that will likely have less impact than we are accustomed to seeing.

Why, in the absence of absolute necessity, would someone buy a house now when they can very probably buy the same house for considerably less in one or two year's time? While paying less for the debt to finance an asset that is falling in price is better than paying more, it is hardly appetizing.

Similarly, the effective transmission of the interest rate cuts through the economy will be much diminished because credit market are not functioning.

While by some estimates about half of all American mortgages are now at high enough interest rates for the borrowers to gain by refinancing into a new mortgage at market rates, the secondary market for most mortgages is closed.

That means that unless you need a standard mortgage of the type that can be bought by Fannie Mae and Freddie Mac, you will have a tough time finding a loan, and those who succeed will find they are paying a bigger premium than is usual.

That secondary market, which effectively shut down last summer, shows no signs of reopening. Quite simply, much of the credit and liquidity on which the world depended came from a segment that is now defunct and that is largely beyond the influence or oversight of central banks.

HOSTAGE TO MARKETS?

Another element that underscores the Fed's relatively weak position is the widespread belief that they cut in response to steep market falls.

Besides raising the specter of moral hazard, that investors will simply take on more risk in hopes of a bailout if things go wrong, I am astonished that they did what they did yesterday, said Roach.

What information came available to Fed that precipitated this dramatic move? There was only one piece of information that came available in last few days and that was a sharp decline in equity markets. We have got prima facia evidence that we have a central bank that is being goaded into dramatic action because of markets.

Investors are already betting that the Fed will cut rates by as much as 50 basis points at their regular meeting next week. Should equity markets take another sharp tumble, you can expect those expectations to become even more exaggerated.

All of this is not to say that monetary policy won't work, but that the effect will be slower and weaker than usual.

Harvard professor and former U.S. Treasury Secretary Lawrence Summers criticized central bank performance in recent years, both in terms of regulatory oversight and in addressing bubbles.

What has been sorely lacking in our globalized world has been an adequate sense of coordination in monetary policy, he told a panel at Davos.

But Summers also said people are usually impatient in downturns as they wait for interest rate cuts to work.

They don't have control right now. Every time there is a recession, the Fed acts and it takes a while to take effect.

So far the evidence has been that ultimately monetary policy has an effect.

Here's hoping that is true, but look for a tough ride until that effect takes hold.

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