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Fed to Consider Dropping Key Interest Rate to 1 Percent

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The Federal Reserve may lower its benchmark interest rate to 1 percent today and one expert said eventually, zero percent is not out of the question.

Steve Matthews of Bloomberg writes:

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.

“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.

The dollar fell for a second day against the euro on bets the Fed will lower interest rates more than economists predict. Futures on the Chicago Board of Trade show a 38 percent chance the benchmark rate will be cut to 0.75 percent from 1.5 percent. The odds increased from 34 percent a day before.

European Central Bank President Jean-Claude Trichet said Oct. 27 he may reduce interest rates next week, citing ebbing inflation and “weakening demand.” The ECB, Fed and four other central banks trimmed rates by a half point on Oct. 8 in an unprecedented coordinated move.

After the emergency cut, the Fed signaled it may ease again, citing “weakening of economic activity and a reduction in inflationary pressures.”

The Fed’s announcement is scheduled to come at 2:15 p.m. Eastern today.

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Written by newscycle

October 29, 2008 at 7:52 am

Posted in Bloomberg, Fed

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