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.
WASHINGTON — 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 opened a two-day meeting Monday afternoon 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 today. A few think the Fed could opt for an even more forceful action — lowering rates by a whopping three-quarters percentage point or more.
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If that larger cut occurs, it would be the lowest on records that track the monthly average of the funds rate going back to 1954. The funds rate is the interest banks charge each other on overnight loans.
“Another rate cut is like trying to provide a safety net for an economy that is in a free fall,” said Richard Yamarone, an economist at Argus Research.
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 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.
A Fed program announced late last month to buy $600 billion in debt and mortgage-backed securities from mortgage giants Fannie Mae and Freddie Mac already has helped push mortgage rates down.
By boosting the quantity of money in the financial system, the Fed has engaged in so-called “quantitative easing” to provide economic relief. The Fed’s balance sheet has ballooned to $2.2 trillion, from close to $900 billion in September, reflecting efforts to mend the financial system.