Fed apt to slash key rate again
But cut won't turn economy around
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.
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 in the funds rate, the interest banks charge each other on overnight loans, is all but certain.
Many economists predict the Fed will cut its rate in half, to just 0.50 percent. A few think the Fed could lower rates by a whopping three-quarters percentage point or more. If that larger cut occurs, it would be the lowest on record since 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
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 rate is used to peg rates on home equity loans, certain credit cards, and other consumer loans.
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 recession. Clobbered 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.
In terms of rate cuts, the Fed is getting ever closer to running out of ammunition, though.
It can lower the funds rate only so far - to zero. Even if that were to happen, the prime rate would fall to 3 percent but no lower. Against that backdrop, Bernanke says the central bank is exploring other ways to stimulate the economy.