Rate Cut Hopes

On Tuesday Federal Reserve Chairman Ben Bernanke and his colleagues began a regularly scheduled two-day meeting to make a fresh assessment of economic and financial conditions and decide their next move on rates.

Traders believe it’s all but certain the Fed will cut rates for the second time this month. The big question, just how low will the Fed go?

Investors on Wall Street and many economists are betting the Fed will slash its key rate by half percentage point to 1 percent. A few, however, however, think the Fed will opt for a smaller, quarter-point reduction to 1.25 percent.

I expect to see a rate cut of 50 basis points, adds CNBC’s Steve Liesman on Fast Money.

Whatever the size of the rate cut, commercial banks' prime lending rate for millions of consumer loans would drop by a corresponding amount. That’s particularly attractive to Liesman. He says, “a cut gets me a reduction in my home equity loan which is tied to the prime rate.”

Of course the same would be true for millions of other Americans. The prime rate, now at 4.5 percent, is used to peg home equity loans, certain credit cards and other floating rate loans.

Under either scenario -- a half percentage point or a quarter point cut -- both the Fed's key rate and the prime rate would fall to their lowest level in more than four years.

The Bottom Line: The market has convinced itself a rate cut is coming and the Fed won’t want to disappoint the market.

What do you think. Tell us now.

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