US Federal reserve considers rate cut as inflation falls sharply

December 17th, 2008 - 1:02 am ICT by IANS  

Washington, Dec 16 (DPA) The US Federal Reserve was expected to slash interest rates by another half-point Tuesday to an historic low of 0.5 percent in an effort to keep the world’s largest economy out of a deep recession.The central bank’s decision is part of a series of dramatic and unprecedented moves taken by the bank over the past year as the country’s financial crisis has led the wider economy on a downward spiral.

Lowering the federal funds rate to 0.5 percent brings the Fed’s options in the traditional monetary policy arena nearly to an end.

The Fed may also signal an expansion of its second policy tool - injecting cash into financial insitutions and other companies that are still threatened with collapse. The availability of credit, outside of government options, has virtually dried up amid the financial turmoil.

The Federal Open Market Committee - the bank’s decision-making body - originally planned a one-day meeting to discuss the rate cut, but extended its gathering to two days to consider additional moves.

The meeting comes as consumer prices plunged by the most on record in November, dropping 1.7 percent since October as a result of plunging energy and petrol prices, the US Labour Department said.

Tuesday’s Fed decision will continue a dramatic series of rate cuts that began in September 2007. The US economy has been in a recession since December of last year and economists are predicting a decline in output of as much as 5 percent in the fourth quarter of 2008.

Fed Chairman Ben Bernanke indicated earlier this month that simple rate cuts were no longer an effective policy tool in the current climate. Banks hoping to stave off bankruptcy and maintain their cash reserves have largely stopped lending regardless of the Fed’s benchmark rate. The Fed needed to focus on boosting liquidity instead.

The Fed may seek to further expand its more than $2 trillion in assets, printing additional money to inject more liquidity into the sputtering economy, Blooomberg News reported.

The central bank is also considering buying up long-term Treasury securities, the yields on which have fallen to record lows as investors seek a safe haven for their money. US stocks have plunged some 40 percent since the start of 2008.

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