If rate cuts will not work, what will? Would nationalizing the mortgage sector do the trick?

With worsening strains in credit market threatening to deepen and prolong an incipient recession, analysts are speculating that the Federal Reserve may be forced to consider more innovative responses -– perhaps buying mortgage-backed securities directly.

“As credit stresses intensify, the possibility of unconventional policy options by the Fed has gained considerable interest, said Michael Feroli of J.P. Morgan Chase. He said two options are garnering particular attention on Wall Street: Direct Fed lending to financial institutions other than banks and direct Fed purchases of debt of Fannie Mae and Freddie Mac or mortgage-backed securities guaranteed by the two shareholder-owned, government-sponsored mortgage companies.

Fed officials have said that, at times like these, the prudent course is to at least evaluate all sorts of ideas, many of which may be rejected. Since 1932, the Fed has had the authority to lend, against collateral, to individuals, partnerships or corporations other than banks in “unusual and exigent circumstances,” subject to the vote of five members of the Board of Governors. (The board has seven seats, but two are currently vacant.) This power has never been used.

But, Mr. Feroli noted, that Congress in 1966 gave the Fed temporary authority, made permanent in 1979, to purchase obligations of government-sponsored enterprises, such as Fannie Mae and Freddie Mac. So far, the Fed hasn’t purchased GSE obligations except in its short-term repurchase operations. When the federal budget was in surplus, the Fed considered outright purchases of GSE obligations, but judged against such a move as it would reinforce the perception of an implicit government guarantee.