Severe turmoil in the credit and equity markets is rapidly quashing worldwide economic growth, and is set to throw the U.S. into a recession according to many market participants.

The International Monetary Fund said in a research paper Wednesday the economy is likely to contract in the third quarter, and into early 2009. 

The IMF cites sagging real estate investments and deteriorating consumption as key reasons it expects the economy to contract.  On the upside, the report says, booming exports will help damper some of the downturn.  Other economic consultancies agree that the recent turbulence could throw the economy into a tailspin.

“The seizing up of global credit markets -- in conjunction with further deflationary pressure on asset prices -- poses significant downside risks to growth … in the United States,” said Global Insight Chief U.S. Financial Economist Brian Bethune.

The question, the research suggests, isn’t whether there will be a recession, but how deep the recession will be and how long will it take for the economy to recover. 

The think tank says intervention by governments will be the key thing that determines how rapidly the economy rebounds.  The Federal Reserve has taken a number of steps in concert with other central banks to quell the financial crisis. Most recently, the Federal Reserve cut a key interest rate by half a percentage point, in hopes of restoring confidence in the embattled financial markets. Additionally, U.S. lawmakers gave the treasury the power to purchase hard-to-value assets that are clogging money markets, and slowing economic growth.

‘Long and Arduous’

The IMF says economic interventions could take a long time to take effect: “The process of balance sheet repair will be long and arduous.”

Charles I. Plosser, President and Chief Executive Officer of the Federal Reserve Bank of Philadelphia, echoed the IMF’s findings.

“Changes in monetary policy can affect real economic activity, such as the unemployment rate or output growth, but only temporarily and with considerable uncertainty as to timing and magnitude,” he said in a speech Wednesday. “The effect of lower interest rates on economic activity may not be felt for nine to 18 months.”

It is possible that the government will have to take even more dramatic steps in coming months to shorten the time it takes for the economy to recover.  Indeed, JPMorgan Chase issued a research note today estimating the Federal Reserve will be forced to slash interest rates by another half a percentage point to 1.00% -- and it was just one of many firms expecting a half-point cut. Some think it will come as early as the Fed’s Oct. 29 meeting.

Other economists wonder whether further rate cuts and liquidity injections will help the economy at all. 

“We have no illusions that today’s interest rate cuts are going to save the world or even alleviate downward pressures on the economies,” High Frequency Economics Chief Economist Carl Weinberg said. “We can only hope the theater of coordinated central bank action to shore up financial markets will give the markets the psychological boost they need to stabilize”