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Fed expected to cut interest rates Tuesday

It would signal that the Fed views a slowdown as a greater threat than inflation.

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For the first time since June 2003, it looks as if the Federal Reserve will be lowering interest rates.

If the nation's central bank does so Tuesday, it will signal that it now views a slowdown as a greater threat than the risk of rising prices. How much it lowers rates will provide a clue as to how deeply the central bankers feel the economy has been damaged by the turmoil in the credit markets.

Many economists expect a Fed rate reduction would just be the start of a program of lower rates – with more to come in October and possibly again in December or January. "It's like potato chips: You can't just do one of them," says David Wyss, chief economist at Standard & Poor's in New York.

A Fed move on short-term rates can ripple through auto loans and short-term corporate borrowing fairly quickly. Lower interest rates could also bolster consumers, since credit cards are often pegged to short-term rates. But mortgage rates, which have been falling, are more widely linked to long-term interest rates.

The full effect of an interest shift can take 18 months to work its way through the economy.

Many economists expect the Fed to reduce the federal funds rate, the rate that banks loan one another their excess reserves at the Fed, by a quarter of a percentage point. "It's already priced into the market, and if they don't do it, there will be a negative reaction," says Ann Owen, a professor of economics at Hamilton College in Clinton, N.Y., and a former economist at the Fed.


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