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 the economy and decide its next move. Another reduction in the funds rate, the interest banks charge one another 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 even lower rates by three-quarters of a percentage point or more.
If that larger cut occurs, the funds rate would be the lowest on records that track its monthly average 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 for many consumer and small-business loans — now 4 percent — would drop by a corresponding amount and give pinched borrowers a dose of relief.
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 extremely reluctant to lend money.
Fearful consumers have sharply cut back their spending, including big-ticket purchases that typically involve financing.
The negative forces have fed off each other, creating a vicious circle that Bernanke and Treasury Secretary Henry Paulson have been desperately trying to break.
In terms of rate cuts, the Fed is getting ever closer to running out of ammunition.
It can lower the funds rate only so far — to zero. Even if that were to happen — a point of debate among economists — 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.
The Fed could buy longer- term Treasury or agency securities on the open market in substantial quantities, Bernanke says. This might lower rates on these securities and help spur buying appetites.
Another option the Fed has mulled: issuing its own debt, which would give the central bank cash and more flexibility to battle the financial crisis. To do that, however, the Fed would need new powers from Congress.
