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    Another rate cut expected from Fed to fight against global crisis

    HotNewsTurkey with wires
    29.10.2008 - 12:34 | Son Güncelleme: 29.10.2008 - 12:34

    Fed policymakers are expected to slash a key interest rate by a half-point, pushing the federal funds rate down to 1 percent, as they wrap up a two-day meeting Wednesday.

    The Federal Open Market Committee (FOMC), the policy-setting arm of the U.S. central bank, is expected to announce its decision at around 21:15 p.m. (1815 GMT) at the conclusion of a two-day meeting.

     

    Ten out of 14 big bond firms polled by Reuters on Monday forecast that the Federal Reserve would lower the overnight federal funds rate target a half point to 1 percent.

     

    A likely cut would put the Fed's target for the interest banks charge each other on overnight lows down at level last seen during a 12-month period from June 2003 to June 2004. Before that period, the funds rate had not been that low in 45 year.

     

    Economists believe the Fed is prepared to cut rates that low because of the rising fears that the financial turmoil of the past two months is raising the specter of a deep and prolonged recession.

     

    "The Fed is going to send a very strong signal that they will do whatever it takes to restore stability to the economy," Mark Zandi, chief economist at Moody's Economy.com., predicted, AP reported.

     

    HOW LOW WILL THEY GO?

    The Fed has cut rates to 1.5 percent from 5.25 percent in eight steps over the past 13 months to counter a credit crisis that started with the collapse of the U.S. mortgage market and spread around the world. The most recent move was a surprise half-point cut between regular meetings on October 8 coordinated with a number of other central banks.

     

    Some market participants think the Fed may be on the way to cutting rates to zero, just as Japan was forced to do to counter deflation in the 1990s. A more-forceful three-quarter point cut would be insurance against the risk of deflation.

     

    But some analysts said that the lack of a clear deflationary threat at this point in time may lead the Fed to opt for the more-incremental half-point move.

     

    "Given that deflationary forces from the collapse of the credit cycle have still not been seen, the FOMC may be reluctant to deliver a larger rate cut," Reuters quoted Marc Chandler, chief global currency strategist at Brown Brothers Harriman, as saying.

     

    The statement the Fed will issue announcing its rate decision may also contain important hints on future policy.

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