NEW YORK (CNN/Money) - Expectations are building that the Federal Reserve will move to cut interest rates when the central bank's policy-makers meet on Aug. 13 or shortly thereafter. But the worry on Wall Street is that a wave of Alan Greenspan's wand would do nothing to stanch stocks' losses.

While they would hardly even consider it a few weeks ago, many economists have come to think a Fed rate cut in coming months is a real possibility and some, like Goldman Sachs' Ed McKelvey, reckon it's a foregone conclusion. The sharp deterioration in stocks looks like it's fed through to the economy and the possibility that we might slip again into recession looks real. Businesses pulled back sharply in July, and a troubled corporate bond market has led to fears of a credit crunch.

Yet even though stocks are supposed to rally when the Fed cuts rates, this time a rate cut could end up having the opposite effect.

"There would be a little short covering rally, but I don't think it would last too long," said Todd Clark, managing director of listed trading at Wells Fargo. "People would worry that the Fed is seeing an economy that's dipping back into recession."

Short-covering rallies occur when investors who have bet against the market by shorting stocks buy them back. The rallies can be sharp, but usually lack substance. Once the shorts have finished their knee-jerk buying, stocks go lower again.

The Fed, the nation's central bank, cut 11 times last year, bringing the target for its fed funds overnight bank lending rate from 6.5 percent to 1.75 percent -- the lowest level in 40 years. But while those cuts probably helped prompt this year's modest recovery in the economy, they did nothing for stocks. Since the day of the first cut, in January 2001, the S&P 500 has fallen 34 percent.

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There aren't many rate cuts left in the gun. If the Fed cuts again and stocks and corporate bonds (which are having problems, too) don't respond, the Fed would have wasted a precious bullet. Market participants are well aware of what's happened in Japan, where rates are effectively at zero, giving the Bank of Japan no easy way to fuel a flagging economy.

Perversely, investors might see a lack of a positive market response to a rate cut as a sign the U.S. was one step closer to the Japan experience -- even though it is investors themselves who are responsible for stocks' movements.

"Investor psychology is so fragile that there would be a what-does-the-Fed-see that-we-don't mentality," said Morgan Stanley fixed-income strategist Kevin Flanagan. "I don't think the market would benefit. The Fed would be best served by holding onto their ammunition to use if they have to."

What's the Fed to do? To begin with, if it does move to cut, it would be best for the cut to catch markets at least somewhat by surprise. In recent speeches Fed officials have been downplaying the risks to the economy. Friday San Francisco Fed President Robert Parry said he wasn't "convinced at the present time that the economic expansion is seriously threatened." On Sunday St. Louis Fed President Poole called the odds of a double-dip recession "very, very low."

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Not everyone is buying it. In astatement on Monday, the Internation Monetary Fund indicated that it will likely have to revise down its prior U.S. growth projections -- and a number of IMF directors said they saw "room for further easing" by the Fed if conditions worsen.

And the market seems to be expecting a cut. In the futures market the odds of a quarter-point cut are being put at 76 percent. One-year Treasuries yield around 1.50 percent -- another bet on a cut.

"A quarter point move is already built in to the market," said Miller Tabak bond strategist Tony Crescenzi. "It wouldn't have any impact."

If the Fed really wants to shore things up, then, it's going to have to cut rates by even more than investors expect. And use up more of the precious cartridges it's still got in its chamber.