The US Federal Reserve is tipped tomorrow to pave the way for it to take more extraordinary measures to kick-start the American economy after it cuts interest rates to an historic low of only 0.5 per cent. The Fed is expected to cut the key US official interest rate, its Fed Funds target rate, by another half-point from the present 1 per cent level that matches past record lows.

But with still lower official rates seen as unlikely to deliver much of an extra boost to stalled US growth, markets are on alert for the Fed to map out action through radical measures to pump funds into the economy.

Another cut in the official rate is seen as likely to prove mainly symbolic. This is because this official rate is in reality only a target for the cost to US banks of borrowing from each other overnight, through the Fed. In practice, distortions in the marketplace have already pushed the true rate at which the US banks can borrow overnight well below the Fed target, to levels approaching zero.

With serious practical dangers to the US economy likely to be posed by cutting rates much below 0.5 per cent, the Fed is likely to use its statement to set out alternative, aggressive action that it can take in place of conventional cuts in interest rates.

Measures open to Ben Bernanke, the Fed Chairman, include a series of steps known by experts as “quantitative easing”, which is already being used unadvertised by the US central bank on a more limited scale. These could involve giving the American economy extra money through the Fed buying up commercial debt in bonds or asset-backed commercial paper held by US banks, or directly buying government bonds from the US Treasury. This would aim to drive up the amount of money in circulation and drive sharply downwards the true cost of borrowing for businesses and consumers.

The Fed is expected to make clear whether official rates will be pushed below 0.5 per cent amid fears that any such move would trigger a destabilising flood of money out of money market mutual funds that would no longer deliver any return — a development that could wreak havoc in US credit markets.

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