Fed seen lowering rates toward zero without inflation worries

Greatly reduced inflation pressures and a desire to spark some life into the economy has almost everyone expecting the Federal Reserve to cut its benchmark overnight interest rate from 1% to 0.50%, marking the lowest level on records dating to July 1954.

Plummeting energy prices have taken the sting out of inflation since crude prices tumbled off their record peak near $147 per barrel in July — also when inflation was at its highest for the year. New York crude-oil for January delivery settled to $46.28 a barrel, falling $1.70 on Friday.

Consumer prices dropped a record 1% in October. The Labor Department reports on Tuesday the November CPI, which is the most watched government inflation barometer. Economists expect another record decline to 1.4%. Add in Friday’s report by the government showing producer prices fell to 2.2% and the Fed has an enormous green light to lower rates with little regard for inflation.

Falling prices is generally great news for consumers, but only to a certain point. If prices head for deflationary levels that hit below the cost to produce goods, further economic turmoil can ensue with production cuts, payroll reductions and deepening unemployment.

The Federal Open Market Committee (FOMC) meeting begins Monday and lasts through Tuesday until a rate decision announcement at around 2:15 p.m. (ET).

Rex Nutting of MarketWatch wrote the following about expectations of a 0.5% cut:

"No one thinks the rate cut will do much good in the current environment of fear and risk aversion. Households and businesses aren’t borrowing because interest rates are too high; they aren’t borrowing because they are afraid the recession will worsen, and because they can’t get a loan from banks that are even more afraid than they are."

At the end of its last meeting on October 29, the Fed cut interest rates to 1%, which was the lowest rate since 2004. That followed an emergency 1/2 percent interest rate cut on October 8.

Reuters "All eyes on the Fed" video reports on several of key data reports for the week. (Disregard the portion where it inaccurately says the Fed will announce any cut decision on Wednesday, as the announcement is expected Tuesday.)

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