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Federal Reserve may cut interest rates to 0% soon

15 December 2008

The Federal Reserve is expected to slash a key interest rate to near zero and signal that it will step up its use of other, less conventional methods to bolster the economy, during a historic two-day meeting starting Monday.

Economists expect the Fed's policymaking Open Market Committee to cut its short-term interest rate target, now at a scant 1%, to a record low of at least 0.5%, or further. The federal funds rate, which banks charge each other for overnight loans, is a benchmark for business and consumer loans.

If the Fed doesn't push its interest rate target to zero on Tuesday, many economists expect it to do so at its January meeting. Then the Fed will have to experiment with other strategies for pumping money into the economy to spur business activity.

Fed Chairman Ben Bernanke has said options include buying Treasury bonds to push down longer-term interest rates, or stepping up financial support for private consumer and business lenders. For example, mortgage rates fell earlier this month after the Fed said it would buy $500 billion in Fannie Mae and Freddie Mac mortgage bonds.

Richard DeKaser, chief economist of National City, predicts the Fed will cut the target by 0.75 points, to 0.25%, and may announce that it will hold rates low as long as needed in order to influence expectations.

Source: usatoday.com