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Investors Expect Federal Reserve Will Drop Interest Rates

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By JEANNINE AVERSA, The Associated Press

Published: December 11, 2007

WASHINGTON - Federal Reserve policymakers are expected to slice a key interest rate for a third time this year in an effort to prevent troubles in the housing and credit markets from sinking the nation's economy.
Fed Chairman Ben Bernanke and his colleagues gather today for their last meeting of the year. They will assess the economy and decide their next move on interest rates.

Analysts are predicting that the Fed will trim its key rate, which is now at 4.5 percent, by one-quarter of a percentage point.

A few analysts even speculate about the possibility of a half-point cut.

On Wall Street on Monday, 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, in turn, would lower their prime lending rate, which is 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 increase their spending, thereby energizing economic activity.

From July through September, the economy logged its best growth in four years.

However, it is expected to slow to a pace of just 1.5 percent or less during 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 can also 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.

It was the first rate reduction in four years.

That reduction was followed up by a smaller, one-quarter-point cut in late October.

At that time, the Fed signaled that those two rate cuts might be sufficient to keep the country's economic expansion on track.

Since then, however, financial conditions have deteriorated. And that has prompted Bernanke to signal that another rate cut may be needed after all as an insurance policy against economic weakness.

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