Borrowing costs likely to drop as Fed weighs another reduction

WASHINGTON -- Individuals and businesses are likely to see their borrowing costs drop further as the Federal Reserve weighs another interest-rate reduction to bolster a sagging economy.

Fed Chairman Ben Bernanke and his colleagues opened a two-day meeting Tuesday afternoon to plot their next move on interest rates. The closed-door gathering comes amid growing fears the country is either on the brink of a recession or has already started slipping into one given the strains from a housing market collapse, a global credit crunch and turbulence on Wall Street. The country's last recession was in 2001.

Many economists believe the Fed will lower its key rate, now at 3.5 percent, by as much as one-half percentage point to 3 percent when policymakers wrap up their meeting today.

If that scenario plays out, commercial banks would be expected to lower their prime lending rate by a corresponding amount -- from 6.5 percent to 6 percent. The prime rate applies to certain credit cards, home equity lines of credit and other loans. Should all of this happen, then both the Fed's key rate and the prime rate would be at nearly three-year lows.

In an emergency gathering convened by Bernanke last week, the Fed ordered a rare, three-quarter-point reduction to its key rate. That came after stocks worldwide plummeted, intensifying recession fears. The Fed's action has helped to restore some confidence among skittish investors, but financial markets remain fragile.

"My feeling is if they don't cut by a half point, they risk undoing the good they did last week with the three-quarter point cut," said Mark Vitner, economist at Wachovia.

On Wall Street, the expectation of another rate cut gave stocks a lift. The Dow Jones industrials gained 96.41 points to close at 12,480.30.

The Fed's rate-cutting campaign, which started in September, is not only aimed at energizing the economy but also providing a psychological boost to investors and consumers, whose spending is vital to the economy's well-being.

Consumer confidence fell sharply in January, the Conference Board reported Tuesday. The survey, however, was taken before the Fed's bold rate cut last week and before the White House and House leaders announced a joint agreement on an economic stimulus package including tax rebates for people and some tax breaks for business.

The big worry is that consumers will clamp down on spending and businesses will put a lid on capital spending and hiring, throwing the economy into a tailspin.

In an ongoing effort to provide relief to cash-strapped financial institutions, the Fed said Tuesday it had auctioned another $30 billion to commercial banks at an interest rate of 3.123 percent. Through the Fed's four auctions thus far, a total of $100 billion in short-term loans has been made available to banks. The first Fed auction of this kind was conducted in December.

Other economic news released Tuesday indicated factories saw demand for their products rise in December by the largest amount in five months. That, however, didn't change the broader picture of a weakening economy.

Many economists believe the economy grew at a feeble 1.2 percent pace during last year's final three months. That would mark a big loss of momentum from the prior quarter's brisk 4.9 percent growth rate. The government releases its estimate of fourth-quarter economic growth Wednesday.