Fed expected to cut US rates to 0.5%

Kathryn Hopkins and Larry Elliott
London Guardian
Tuesday, Dec 16, 2008

The Federal Reserve is tonight expected to step up its battle to revive the recession-hit US economy when it cuts interest rates to a record low of 0.5% and announces measures first tried in the Great Depression to bring down borrowing costs for companies and home owners.

The American central bank began a two-day meeting yesterday as it announced data that showed another sharp plunge in industrial output last month. Wall Street believes the recent calamitous economic news guarantees the 10th cut in the Fed funds rate since the credit crunch began in August 2007.

Analysts also expect measures to bring down the longer term cost of borrowing. This process, known as quantitative easing, involves the central bank buying up long-dated treasury bonds in order to reduce supply and eventually bring down long term interest rates.

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Graham Turner, of consultants GFC Economics, said: "It is no exaggeration to say that this week's Fed meeting is the most important since April 1932."

The central bank, chaired by Ben Bernanke, has already slashed rates by 4.25 percentage points over the last 14 months to leave them at 1%.

The Fed said yesterday that US industrial production dropped 0.6% in November, with manufacturing down 1.4%. This was slightly less than expected, but still prompted several economists to predict that industrial production would drop by about 10% in 2008.

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