Fed expected to cut key interest rate to all-time low
WASHINGTON — The Federal Reserve is widely expected to ratchet downward a key interest rate — perhaps to an all-time low — to intercept the sinking management 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 beating on the ailing economy, which has been mired in a recession since after all the rest December, and to come to a conclusion their next move on interest rates.
Fighting the worst monetary crisis because that the 1930s, the Fed already has pushed down its strength lever beneficial to influencing the economy — the federal funds rate — to 1 percent, a point seen only once before in the ultimate half-century.
Many economists predict the Fed will cut its rate in half — to just 0.50 percent when the sitting wraps up today. A few think the Fed could opt for the sake of an even again forceful action — lowering rates by a whopping three-quarters percentage point or more.
If that larger cut occurs, it would exist the lowest on records that track the monthly average of the funds rate going away from the thicker settlements to 1954. The funds defame is the interest banks charge each other on overnight loans.
“Another rate cut is like afflictive to provide a safety net for an established order that is in a free fall,” declared Richard Yamarone, any 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 on all sides.
Walloped by dint of. the financial crisis, worried banks receive hoarded their cash and been extremely loath to lend cash to customers. Fearful consumers, watching jobs vanish and their investments tank, have violently cut back their expenditure, including big-ticket purchases similar homes and cars that typically involve financing.
The negative forces fed off each other, creating a contrary cycle that Bernanke and Treasury Secretary Henry Paulson be in possession of been desperately trying to break.
The Fed be possible to lower the supply rate only such 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 real quantities. This might lower rates on these securities and help whip 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 shoot forth mortgage rates down.
By boosting the quantity of money in the fiscal system, the Fed has engaged in so-called “quantitative easing” to agree 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.
Original text: http://seattletimes.nwsource.com/html/businesstechnology/2008524452_fedrates16.html?syndication=rss
