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Tuesday, December 16, 2008

Fed May Cut Target Rate to Historic Low

Mark Lieberman, Senior Economist

FOXBusiness

With the slowing -- now officially recessionary -- economy eclipsing inflation as a threat, the Federal Open Market Committee is expected Tuesday to drop the target Federal Funds rate to 0.50%, a one-half percentage point cut.

The Fed Funds rate would be below 1.00% for the first time in the Federal Reserve’s 95-year history.

The FOMC continues to tweak interest rates in its effort to address an extended credit crunch in which lenders continue to express -- through actions -- reluctance to advance loans. The Fed Funds rate is the rate banks charge each other for overnight loans. Banks borrow from each other to meet reserve requirements set by bank regulators, including the Federal Reserve.

The prime interest rate is typically set at three percentage points above the Fed Funds rate, and the prime rate is the basis for credit card, home equity and auto loans.

This month’s meeting of the FOMC had originally been scheduled for a single-day – Tuesday – but was extended as weakness in the economy grew more pronounced.

Here’s a quick guide to what the FOMC members are looking at in their meeting – which began Monday afternoon -- comparing the economic environment today with the situation before the October 28-29 meeting when the Committee cut the Fed Funds rate by ½ a percentage point to 1.00% following a similarly sized inter-meeting cut. (When the FOMC met mid-September it left the target rate unchanged at 2.00 %.)