WORLD PROPERTY CHANNEL ®

(NEW YORK, NY) -- In their boldest forecast yet, Standard & Poor's top economists David Wyss and Beth Ann Bovino say the Federal Reserve Bank tomorrow could cut the overnight lending rate used by banks from the current 1 percent to zero.

The move would be made to stimulate greater lending by banks to businesses, corporations and individuals, according to S&P Chief Economist Wyss and Senior Economist Bovino.

David Wyss

The commercial and residential retail sectors would see immediate relief for developers and home builders who, in many instances, currently can't close deals and projects because banks have not been extending their credit limits as they have in the past, Real Estate Channel has previously reported.

The federal funds rate hasn't dropped below 1 percent since the 1950s. The Fed lowered the rate by 50 basis points to 1 percent on Oct. 29.

Heady as the zero interest rate may appear, the S&P economists speculate the zero move may still be a long shot---but not too far away, if it doesn't happen Tuesday.

"The Fed has suggested it is nervous about going to zero because of the impact on Treasury yield, but with Treasury yields already at zero, it seems difficult to mess them up more," says Wyss.

Beth Ann Bovino

The S&P economists' best guess Monday was that the Fed would make a 50-basis point cut to 0.5 percent.  "But a 75 basis points (cut)  is certainly possible,"  Bovino says. "If  the Fed cuts 50 basis points on Tuesday, they will probably move again in January."

The Tuesday meeting of the Federal Reserve bank governors in Washington marks the group's last scheduled policy meeting for 2008.

Despite the headline speculation on rate cuts, the Fed and the Treasury "will be concentrating on bringing market rates down, not on the fed funds rate," says Wyss.


"The direct purchases of mortgage-backed securities and commercial paper has improved availability and brought rates down for those categories.

"It is a profitable business for the Treasury, since the 10-year Treasury yield is only 2.6 percent, while the 30-year mortgage rate, which has roughly the same duration, is 5.5 percent."

Prime Rate, Federal Funds Rate, Federal Discount Rate
   
Latest    Last Month    Last Year    Updated

WSJ Prime Rate        4.00     4.00    7.25    Oct. 30, 2008

Fed. Funds Rate       1.00     1.00    4.29    Oct. 29, 2008

Fed. Discount Rate   1.25     1.25    5.00    Oct. 29, 2008

• The Prime Rate is the rate charged by banks to their most credit- worthy customers for loans.

• The Fed Funds Rate is the interest rate at which banks lend money to each other, usually on an overnight basis.

• The Fed Discount Rate is the interest rate charged to commercial banks and other depository institutions on loans they receive from their regional Federal Reserve Bank's lending facility-the discount window.