Borrowing Costs Expected to Decline Further

U.S. individuals and businesses are likely to see their borrowing costs drop further as the Federal Reserve weighs another interest-rate reduction to bolster a sagging economy.

Federal Reserve Bank Chairman Ben Bernanke
Pablo Martinez Monsivais
Federal Reserve Bank Chairman Ben Bernanke

Fed Chairman Ben Bernanke and his colleagues were scheduled to open a two-day meeting Tuesday afternoon to plot their next move on interest rates.

The closed-door gathering comes amid growing fears the U.S. is either on the brink of a recession or has already started slipping into one given the strains from a housing market collapse, a global credit crunch and turbulence on Wall Street. The country's last recession was in 2001.

Many economists believe the Fed will lower its key rate, now at 3.5 percent, by as much as one-half percentage point to 3 percent when policymakers wrap up their meeting Wednesday afternoon.

If that scenario plays out, commercial banks would be expected to lower their prime lending rate by a corresponding amount--from 6.5 percent to 6 percent. The prime rate applies to certain credit cards, home equity lines of credit and other loans. Should all this happen, then both the Fed's key rate and the prime rate would be at nearly three-year lows.

In an emergency gathering convened by Bernanke last week, the Fed ordered a rare, three-quarter-point reduction to its key rate. That move came after stocks worldwide plummeted, intensifying recession fears. The Fed's action has helped to restore some confidence among skittish investors. However, financial markets remain fragile.

"My feeling is if they don't cut by a half point, they risk undoing the good they did last week with the three-quarter point cut," said Mark Vitner, economist at Wachovia.

In an ongoing effort to provide relief to cash-strapped financial institutions, the Fed said Tuesday it had auctioned another $30 billion (euro20.31 billion) to commercial banks at an interest rate of 3.123 percent. Through the Fed's four auctions thus far, a total of $100 billion (euro67.69 billion) in short-term loans has been made available to banks. The first Fed auction of this kind was conducted in December.

The government reported Tuesday that factories saw demand for their products rise in December by the largest amount in five months. That, however, didn't change the broader picture of a weakening economy.

Many economists believe the U.S. economy grew at a feeble 1.2 percent pace during the final three months of last year. That would mark a big loss of momentum from the prior quarter's brisk 4.9 percent growth rate. The government releases its estimate of fourth-quarter economic growth Wednesday.