Fed poised to halve interest rates, Japan plots steps to ease funding

Responding to the worst financial crisis in 80 years, the Federal Reserve is expected to cut its benchmark rate by at least half a point to 0.5 percent, its lowest in more than half a century.

As it runs out of room for further rate cuts, the Fed is likely to promise to look at other instruments to pull the world’s biggest economy out of recession. The Fed may take a leaf out of the Japanese economic textbook. In Japan, where rates are already at an ultra-low 0.3 percent, the finance minister urged the central bank to also take unorthodox steps to ease a funding crunch. Bank of Japan Governor Masaaki Shirakawa said he was studying possible effects of so-called quantitative easing, a policy of flooding banks with zero interest money, which Japan adopted early this decade to spur lending and jump-start a stagnant economy.

Economists expect the Fed to acknowledge it will have to resort to direct purchases of government and mortgage-related debt and possibly Japanese-style money injections.

Analysts are also debating whether the biggest plunge in business confidence in three decades will prompt the Bank of Japan to lower rates again when it meets this week.

Shirakawa on Tuesday appeared to keep the door open to more easing, telling lawmakers economic conditions grew increasingly severe and pledging “appropriate actions.” “The last time the world economy was in severe conditions was 1929 and the years that followed,” he told lawmakers.

Ahead of the Fed, the central bank in Saudi Arabia, the world’s biggest oil exporter, cuts its two main interest rates by 50 basis points on Tuesday.