The worst financial crisis in 70 years has forced the US Federal Reserve to employ all the weapons in its arsenal — including cutting interest rates to near historic lows — to try to keep the country from plunging into a deep recession.
Fed policymakers were expected to slash a key interest rate by a half-point, pushing the federal funds rate down to 1 percent, as they were to wrap up a two-day meeting yesterday.
That would put the Fed’s target for the interest banks charge each other on overnight lows down at level last seen during a 12-month period from June 2003 to June 2004. Before that period, the funds rate had not been that low in 45 years, since Dwight Eisenhower was president.
Economists believe the Fed is prepared to cut rates that low because of the rising fears that the financial turmoil of the past two months is raising the specter of a deep and prolonged recession.
“The Fed is going to send a very strong signal that they will do whatever it takes to restore stability to the economy,” said Mark Zandi, chief economist at Moody’s Economy.com.
The prospect of another sizable rate cut, coming just three weeks after a half-point move that was coordinated with a number of countries, sent the stock market soaring on Tuesday, pushing the Dow Jones industrial average up by 889.35 points, its second-biggest point gain in history.
A half-point rate cut yesterday would push borrowing costs lower for millions of consumer and business loans with banks moving quickly to match the Fed’s action by lowering their benchmark prime lending rate from 4.5 percent, where it has been for the past three weeks, down to 4 percent.
Many analysts believe a rate cut in the US will be followed by cuts in other major economies as central banks around the world try to inject confidence into a badly shaken financial system.
Analysts are split, however, on whether a Fed rate move this week will be followed by another rate cut at the central bank’s last meeting of the year on Dec. 16.
Some analysts think the Fed could drive the funds rate as low as 0.5 percent and might even go to zero, which the Bank of Japan did in an effort to combat a decade-long bout of malaise in the 1990s caused by a real estate bust in that country.
Other analysts believe the Fed will be content to lower the funds rate to 1 percent and leave it there, partly because pushing it any lower would remove any cushion should the economy fail to respond.
These analysts believe the Fed will depend on its other efforts to battle the credit crisis, which involve supplying massive resources to the banking system.
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