Fed to press rates toward zero

By Alister Bull

WASHINGTON (Reuters) - The U.S. Federal Reserve is expected to drop interest rates close to zero on Tuesday, but anticipated remarks on unconventional methods to dispel a year-old recession are what will really matter.

Economists forecast a clear statement that the U.S. central bank will aggressively deploy so-called quantitative easing measures to shelter the economy from a steepening downturn, but do not expect details of what steps it will actually take.

Those words would accompany a decision by the Fed to lower its target for overnight rates by at least a half-percentage point, economists believe.

A half-point cut would take the bellwether federal funds rate to just 0.5 percent, the lowest on records dating to July 1954, as the central bank battles a recession many think will stretch well into next year.

The announcement is expected around 2:15 p.m. on Tuesday at the end of a two-day meeting. The gathering had initially been scheduled for a single day, but was extended so policy-makers could study options for unusual steps to spur the economy with little room left to lower borrowing costs.

"From here on out, monetary policy has to rely primarily on non-traditional tools, tools other than the funds rate, to try to stimulate the economy," said former Fed Governor Lyle Gramley, who expects the Fed to spell this out.

"They are certainly going to have to acknowledge that non-traditional methods are going to be employed aggressively to try to provide assistance to the economy," he said.