WASHINGTON — Federal Reserve policymakers are widely expected to cut 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 on the Federal Open Market Committee gather today for 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 federal funds rate, now at 4.5 percent, by one-quarter of a percentage point. A few even speculate about the possibility of a half-point cut.
If the Fed cuts its 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 fastest growth in four years.
But it is expected to slow to a pace of 1.5 percent or less over the final three months of the year as the housing collapse and credit crunch chill consumers, sapping economic growth. The odds of a recession have grown.
Oil prices, which had neared $100 a barrel, have moderated but are still high.
High energy prices can slow economic activity and also spread inflation if they cause the prices of lots of other goods and services to rise.
The Fed lowered the fed funds rate — the rate it charges on overnight loans to its member banks — in September by a half-percentage point, the first reduction in four years.
It followed with a quarter-point cut in late October.
At that time, the Fed signaled that those two rate cuts might be enough 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 economic weakness.