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Fed poised to slash interest rate
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WASHINGTON - With the country spiraling deeper into recession, the Federal Reserve is ready to slash its key interest rate — perhaps to an all-time low — in hopes of cushioning some of the economic fallout felt by many struggling Americans.
To battle the worst financial crisis since the 1930s, Fed Chairman Ben Bernanke and his colleagues already have ratcheted down their main lever for influencing the economy — the federal funds rate — to 1 percent, a level seen only once before in the last half-century.
The Fed opens a two-day meeting today to assess to economy and decide its next move on rates. Another reduction to the funds rate, the interest banks charge each other on overnight loans, is all but certain to be announced Tuesday.
Many economists predict the Fed will cut its rate in half — to 0.50 percent. A few think the Fed could opt for an even more forceful action — lowering rates by a three-quarters percentage point or more. If that larger cut occurs, it would be the lowest on records that track the rate going back to 1954.
Even an aggressive rate reduction won’t turn the economy around, analysts said.
“It is not so much going to give the economy a big push forward. It’s more a case of trying to help the economy from being pushed further backward by all these negative events,” said Stuart Hoffman, chief economist at PNC Financial Services Group.
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 flat-lined economy. So far, though, the Fed’s aggressive rate reductions have failed to lift the country out of a recession that started last December.
Clobbered by the financial crisis, worried banks have hoarded their cash and been reluctant to lend money. Consumers, watching jobs vanish and their investments tank, have sharply cut spending, including 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.
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