Fed Ponders New, Drastic Rate Cut

Federal Funds Rate Expected To Be Slashed By At Least Half To .5 Percent

(AP)  The Federal Reserve is widely expected to ratchet down a key interest rate - perhaps to an all-time low- to prevent the sinking economy from falling deeper into the doldrums.

Federal Reserve Chairman Ben Bernanke and his colleagues open a two-day meeting Monday to take a fresh pulse on the ailing economy, which has been mired in a recession since last December, and to decide their next move on interest rates.

Fighting the worst financial crisis since the 1930s, the Fed already has pushed down its main lever for influencing the economy - the federal funds rate - to 1 percent, a level seen only once before in the last half-century.

Many economists predict the Fed will cut its rate in half - to just 0.50 percent when the session wraps up on Tuesday. A few think the Fed could opt for an even more forceful action -lowering rates by a whopping three-quarters percentage point or more. If that larger cut occurs, it would be the lowest on records that track the monthly average of the targeted funds rate going back to 1954. The funds rate is the interest banks charge each other on overnight loans.

However deeply the Fed decides to cut rates, the prime rate - now at 4 percent - for many consumer and small-business loans would drop by a corresponding amount. The prime lending rate is used to peg rates on home equity loans, certain credit cards and other consumer loans. Cheaper rates could give pinched borrowers a dose of relief.

The goal of lower borrowing costs is to entice people and businesses to spend more, which would revive the economy. So far, though, the Fed's aggressive rate reductions have failed to turn the economy around.

Walloped by the financial crisis, worried banks have hoarded their cash and been extremely reluctant to lend money to customers. Fearful consumers, watching jobs vanish and their investments tank, have sharply cut back their spending, including big-ticket purchases like homes and cars that typically involve financing.

The negative forces have fed off each other, creating a vicious cycle that Bernanke and Treasury Secretary Henry Paulson have been desperately trying to break.

The Fed can lower the fund rate only so far - to zero, and is getting closer to exhausting its rate-reduction ammunition. However, Bernanke has made clear the Fed has other tools available to stimulate the economy.

For example, the Fed could buy longer-term Treasury or agency securities on the open market in substantial quantities. This might lower rates on these securities and help spur buying appetites.

[oneworldusa]

Looking forward to a 4.5% refinance to help jump-start the economy.

[incog-nito]

Until the outsourcing -- along with the permanent job loss -- is stopped, there''s absolutely nothing the government can do to save the economy. Of course, since they are not going to do anything about the real cause, there is no saving this economy.

[labrat9999]

This stuff always surprises me. Which part of hundreds of thousands of people are being laid off, or are already laid off, don''t these morons understand? They can lower the interest rate to zero, they can even promise to give me money to borrow money but I still can''t spend money I don''t have or can''t pay for!! Until we get a real change in Washington that understands the only way to get us out of this mess is to create jobs, none of this nonsense is going to work. If you don''t believe me, take a look at what the Japanese tried in the 80''s to fix their bubble bust. Didn''t work then, won''t work now. The only people that profit from these rediculous ideas are the same people that brought us into this mess...the Wall street excutives, bankers, and their buddy million, make that billionaires!

[lochlan-2009]

He will cut the rate 3/4% and than peoples ARM''s will go up right after. That way the bank can continue to make money on both ends. This government isn''t hard to follow. What is the greediest thing they can do for the rich, and that is what will be done.

[lewiston14]

If bank A wants to loan bank B a billion over the weekend why does the Federal Reserve think they should get a cut. It is between 2 banks.

[lewiston14]

I really dont see 1/2 a point as drastic. Fact is the only have 1 percent to play with. I dought the markets will even notice. I still blame Greenspan and Ben. Every time there was a spark in the economy they would come along with a rate increase to stamp it out. Now they live with what they do. This Federal Reserve system has to go. I does nothing but drive down the economy on the wims of a single person.