J.P. Morgan sees Fed cutting rates to zero in Jan

Federal Reserve Chairman Ben Bernanke before testifying before the House Financial Services Committee on Capitol Hill, November 18, 2008. REUTERS/Molly Riley

NEW YORK (Reuters) - The Federal Reserve will lower its policy rate to zero percent by January in its attempt to avert a prolonged recession and to revive the struggling credit market, according to J.P. Morgan Securities analysts.

The Fed will likely hold its target rate on benchmark federal funds -- the overnight cost banks charge each other to borrow surplus reserves -- at zero at least through the end of 2009, J.P. Morgan analysts wrote in a research note published on Monday.

The Fed’s fed fund target rate is currently 1.00 percent. The U.S. central bank began its rate-cutting campaign in September 2007 when the fed funds target was at 5.25 percent.

A number of analysts widely expect the Fed to lower the policy target rate to 0.50 percent at the end of its December 15-16 meeting. Some predict the U.S. economy may contract by an annualized 4.0 percent in the fourth quarter.

J.P. Morgan analysts now see the Fed stepping up its rate easing in conjunction with its various financing programs and proposed fiscal stimuli in the coming months.

They predicted the Fed will pare the fed funds target rate by half a percentage point at its December meeting and by another half point at its January 27-28 meeting.

This compared with their forecast of a quarter-point cut in a Reuters poll conducted on Nov 10.

Aggressive monetary and fiscal stimuli will be much needed, as many economists believe a U.S. recession will continue into the middle of next year.

J.P. Morgan analysts expect an upturn in the second half of next year, with gross domestic product posting a 1.5 percent annualized increase in the third quarter of 2009.

Reporting by Richard Leong; Editing by Dan Grebler