Fed Expected to Lower Key Interest Rate

Federal Reserve Board Chairman, Ben Bernanke, speaks at the CATO Institute's annual Monetary Conference in Washington in this Nov. 14, 2007 file photo. Twice the Fed has cut rates this year and officials suggested in October that might be enough for the year to help the economy survive all that stress. Then the problems snowballed, leading Bernanke to signal one more cut might be needed. Analysts expect the Fed to trim its key rate, now at 4.5 percent, by one-quarter of a percentage point at their next meeting . AP Photo/Caleb Jones, File) (Caleb Jones - AP)

WASHINGTON -- Federal Reserve policymakers are widely expected to slice a key interest rate for a third time this year to prevent troubles in the housing and credit markets from sinking the economy.

Fed Chairman Ben Bernanke and his colleagues gather Tuesday, their last meeting of the year, to assess the economy and decide their next move on interest rates.

Analysts predict the Fed will trim its key rate, now at 4.5 percent, by one-quarter of a percentage point at that time. A few even speculate about the possibility of a half-point cut.

On Wall Street, investors' anticipation of another rate reduction gave a big lift to stocks. The Dow Jones industrials jumped 101.45 points to close at 13,727.03.

If the Fed cuts its key rate, commercial banks would lower their prime lending rate _ now at 7.5 percent _ by a corresponding amount. The prime rate applies to certain credit cards, home equity lines of credit and other loans.

The rationale behind the lower rates is that they will induce consumers and businesses to boost spending, energizing economic activity.

From July through September, the economy logged its best growth in four years. But it is expected to slow to a pace of just 1.5 percent or less over the final three months of the year as the housing collapse and credit crunch chill consumers, sapping overall economic growth. The odds of a recession have grown.

Oil prices, which had neared $100 a barrel, have moderated. But they are still high. High energy prices are a double-edged sword. They can slow economic activity and spread inflation if they cause the prices of lots of other goods and services to rise.

The Fed lowered its key rate in September by a bold, one-half percentage point; that was the first reduction in four years. It was followed up by a smaller, one-quarter-point cut in late October. At that time, the Fed signaled that those two rate cuts may be sufficient to keep the economic expansion on track. Since then, however, financial conditions have deteriorated, prompting Bernanke to signal that another rate cut may be needed after all as an insurance policy against undue economic weakness.

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