Fed expected to cut interest rates

Some economists say the cut will be one-half of a percentage point.

WASHINGTON (AP) — Desperate to aid an economy in crisis, the Federal Reserve is ready to deliver yet another big interest rate cut.

How big? One-half of a percentage point, some economists say. Investors and others hope for even more, a three-quarters cut or perhaps a full point, given the turmoil on Wall Street. It will be a close call, Fed watchers say.

The speculation ends Tuesday afternoon after Fed Chairman Ben Bernanke and central bank policymakers have met.

Whatever the decision, for a growing number of analysts, one more rate reduction will not be the lifeline that pulls the country back from the brink of the first recession since 2001.

Experts in this camp believe the economy is shrinking now because of the fallout from the housing and credit debacles. Businesses are shedding jobs, Wall Street is convulsing, energy prices are skyrocketing and people are reluctant to spend. Yet these economists say lower interest rates should help cushion the blows of a recession.

“Many consumers, businesses and investors are simply running scared right now,” economic consultant Carl Tannenbaum said.

The rate-cutting began in September with the goal of shoring up the economy and reviving spending.

The Fed’s key rate has fallen from 5.25 percent to 3 percent. The pace picked up measurably in January when, during an eight-day period, the Fed slashed the rate by 1.25 percentage points. It was the biggest one-month reduction in a quarter-century.

In response, commercial banks have lowered prime lending rates by corresponding amounts.

The prime rate, now at a nearly three-year low of 6 percent, applies to certain credit cards, home equity lines of credit and other loans.

A cut ordered by the Fed on Tuesday would further drop the prime rate.

Even with the Fed’s aggressive moves, economic and financial conditions keep deteriorating.

The Fed in recent days has taken extraordinary steps to help banks and Wall Street investment firms survive the stresses of the credit crisis.

Financial institutions have racked up multibillion-dollar losses when mortgage-backed investments soured with the collapse of the housing market.

On Friday, the Fed used a Depression-era procedure to aid troubled Bear Stearns Cos. The investment bank, which faced a possible collapse, received a rescue package from the Fed and JPMorgan Chase & Co. Bear Stearns, which had made a fortune in mortgage-backed securities, has taken $2.75 billion in write-downs since last year.

Consultations about the situation continued through the weekend among representatives from the Fed, Treasury Department, financial institutions and others.