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Fed May Cut Rate to 1%, Signal Steps to Save Economy

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Steve Matthews
Wednesday, Oct 29, 2008

The Federal Reserve may lower its benchmark interest rate to 1 percent today and signal further reductions to levels unseen since Dwight Eisenhower was president.

Tumbling commodities prices and weaker consumer spending are slowing inflation, which officials described as a “significant concern” at their last scheduled meeting in September. Tomorrow, the Commerce Department will probably report that the economy shrank at a 0.5 percent annual rate in the third quarter, the most since the 2001 recession, economists predict.

The Fed “will be very aggressive,” said Mark Gertler, a New York University economist and research co-author with Fed Chairman Ben S. Bernanke. “Inflation risks are off the table” and “the issue now is how bad the recession will be.”

He predicted the benchmark rate will be cut by half a point today, matching the median forecast of economists surveyed by Bloomberg News. Bernanke and his team could push borrowing costs to zero by June if the credit crunch intensifies, Gertler said.

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The Fed has already cut the benchmark rate from 5.25 percent in the past 13 months and created six lending programs channeling more than $1 trillion into the financial system. Banks are still reluctant to lend to each other and the Standard & Poor’s 500 Index is down almost 36 percent this year, even after yesterday’s surge.

  • A d v e r t i s e m e n t

The FOMC is scheduled to announce its decision on rates at about 2:15 p.m. in Washington.

`Inadequate Growth’

“The predominant concern will be inadequate growth,” said former Fed Governor Lyle Gramley, now a Washington-based senior economic adviser for Stanford Group Co., a wealth-management firm. “If the economy shows additional signs of a deepening recession, I think the Fed will decide that the floor is not 1 percent.”

Gramley predicts that policy makers will again cut the main rate by 0.5 percentage point at their next scheduled meeting in December, pushing it toward levels last seen in 1958. “Zero is a possibility,” he said.

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This article was posted: Wednesday, October 29, 2008 at 5:13 am

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