Federal Reserve may cut interest rates to 0% soon

WASHINGTON -- The Federal Reserve is expected to slash a key interest rate to near zero and signal that it will step up its use of other, less conventional methods to bolster the economy, during a historic two-day meeting starting Monday.

Economists expect the Fed's policymaking Open Market Committee to cut its short-term interest rate target, now at a scant 1%, to a record low of at least 0.5%, or further. The federal funds rate, which banks charge each other for overnight loans, is a benchmark for business and consumer loans.

If the Fed doesn't push its interest rate target to zero on Tuesday, many economists expect it to do so at its January meeting. Then the Fed will have to experiment with other strategies for pumping money into the economy to spur business activity.

Fed Chairman Ben Bernanke has said options include buying Treasury bonds to push down longer-term interest rates, or stepping up financial support for private consumer and business lenders. For example, mortgage rates fell earlier this month after the Fed said it would buy $500 billion in Fannie Mae and Freddie Mac mortgage bonds.

Richard DeKaser, chief economist of National City, predicts the Fed will cut the target by 0.75 points, to 0.25%, and may announce that it will hold rates low as long as needed in order to influence expectations.

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Other economists predict a big rate cut but expect little impact. Banks have pulled back from lending, and consumers are reining in spending. The federal funds rate has already fallen well below the Fed's 1% target in credit markets. The rate averaged just 0.14% on Thursday, for example. Interest rates on Treasury bonds have also fallen to historic lows as investors snap them up, desperate for a safe investment.

Rates have fallen so far that some money market mutual funds, long seen as safe investments, could shut down or post losses. Some funds already earn less in interest from investments than it costs to run the fund.

Nigel Gault of IHS Global Insight says tax and spending policy will become increasingly important for the economy. President-elect Obama wants Congress to pass an economic stimulus bill in January containing hundreds of billions of dollars in new spending.