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After an unprecedented series of government interventions to prop up markets and bolster the economy, policymakers in the U.S. Federal Reserve are will announce their next move on Tuesday, with yet another interest-rate cut widely expected. The central bank might even cut short-term borrowing rates to zero, though most experts believe the Fed will leave itself some room for further cuts next year, if necessary.

Members on the Federal Open Market Committee, the Fed`s rate-setting body, are facing an economy mired in a severe recession and struggling through a dangerous and debilitating mix of crises in the housing, financial, and credit markets.

This has led to a fear of deflation, a threat of persistent price declines that the central bank, which is usually focused on beating inflation, has not had to deal with in some time.

The target for the Fed`s key interest rate is currently at 1 percent, although the actual funds rate has been trading substantially below that. The Federal Reserve is widely expected to cut the funds rate in half, bringing it to 0.50 percent.

Cutting another half percentage point would take rates to their lowest levels in over half a century. The last time rates were at 0.50 percent was in July 1954
Josh Bivens, an economist with the Economic Policy Institute, told RTTNews that the members of the Federal Open Market Committee will cut to 0.5 percent Tuesday, and then begin 2009 by slashing the funds rate to zero as policymakers work to bring the economy out of recession.

In terms of setting the funds rate at zero, Bivens said he `wouldn`t be shocked if they did it tomorrow.`

`The effective rate for the past month or so has actually been essentially zero, and, there`s little reason to set the `target` rate higher than this,` he noted.

A collapse in the nation`s housing market sparked substantial turmoil in financial markets this year, leading to a credit crunch and dragging the U.S. economy into a recession. As the unemployment rate climbs and nervous Americans cut back on spending, a vicious cycle is taking hold that the Federal Reserve is working to shake.

In an attempt to boost interbank lending and add liquidity to credit markets, the Fed has introduced a bevy of lending facilities. These lending facilities combined with the state of the economy have taken away from the impact of interest rate cuts, Bivens noted.

`At this point, I think interest-rate policy is pretty much a dead letter,` Bivens said. `Everybody knows rates will get to zero, and, everybody also knows that something well below zero (which the Fed cannot engineer) would be needed to spur investment and consumption in durables.`

`So, the Fed`s main job at this point is the more exotic policies that aim to re-capitalize the broader financial sector,` he explained.

In addition, he said that cutting the funds rate will not have an impact on credit availability, noting that high rates are not the reason for the current constriction of the credit markets.

Bivens was echoed by Joseph Saluzzi, the co-head of equity trading at Themis Trading. In an interview with RTTNews, Saluzzi said that most traders have already discounted the expected rate cut, and are `looking for other things that the Fed can do other than…lower interest rates.`

`The Fed has shown that it can do many different things with all these different programs they`ve thrown out there,` he said. `We have an expression they have a `hollow leg` to keep on throwing money out, and I think most people anticipate` that the Federal Reserve will continue pumping money into the market, he said.

The muted response to any interest rate decision could be a result that outlasts the current recession, Bivens said. Although he noted that raising interest rates will `always indeed be a good way to slow the economy down,` the opposite might not be true for reducing the federal funds rate.

`There will be times when cutting rates off a high base will do good for an economy that needs some stimulus,` Bivens said. `But, between globalization and asset market bubbles, it`s true that the efficacy of cutting the short-term rates traditionally targeted by the Federal Reserve have lost some effectiveness.`

Although the interest rate decision itself loses importance, investors will be more focused than ever on the statement accompanying the rate cut. According to Bivens, the Federal Reserve will warn of a new threat much different than the issue that divided policymakers early in 2008. Deflation, rather than inflation, is increasingly seen as a concern, and Bivens said he expects the Fed will mention it in the statement.

`What would be most useful - don`t know that I expect it, but, would find it welcome - would be an endorsement of a large fiscal stimulus package,` he said regarding the statement.

`I expect there to be some allusion to the dangers of deflation as well, although it may be oblique,` Bivens added.

The Fed`s announcement is scheduled for 2:15 pm ET Tuesday, after policymakers conclude a two-day meeting.