WASHINGTON - WITH the US spiralling deeper into recession, the Federal Reserve is ready to slash its key interest rate - perhaps to an all-time low- in hopes of cushioning some of the economic fallout felt by many struggling Americans.

To battle the worst financial crisis since the 1930s, Fed Chairman Ben Bernanke and his colleagues already have ratcheted down their main lever for influencing the economy - the federal funds rate - to 1 per cent, a level seen only once before in the last half-century.

The Fed opens a two-day meeting on Monday to assess the economy and decide its next move on rates. Another reduction to the funds rate, the interest banks charge each other on overnight loans, is all but certain to be announced on Tuesday.

Many economists predict the Fed will cut its rate in half - to just 0.50 per cent. A few think the Fed could opt for an even more forceful action - lowering rates by a whopping three-quarters percentage point or more. If that larger cut occurs, it would be the lowest on records that track the monthly average of the targeted funds rate going back to 1954.

Even an aggressive rate reduction won't turn the economy around, analysts said.

'It is not so much going to give the economy a big push forward. It's more a case of trying to help the economy from being pushed further backward by all these negative events,' said Mr Stuart Hoffman, chief economist at PNC Financial Services Group.

However deeply the Fed decides to cut rates, the prime rate - now at 4 percent - for many consumer and small-business loans would drop by a corresponding amount.

The prime lending rate is used to peg rates on home equity loans, certain credit cards and other consumer loans. Cheaper rates could give pinched borrowers a dose of relief.

The goal of lower borrowing costs is to entice people and businesses to spend more, which would revive the flat-lined economy.

So far, though, the Fed's aggressive rate reductions have failed to lift the country out of a recession that started last December.

Clobbered by the financial crisis, worried banks have hoarded their cash and been extremely reluctant to lend money to customers.

Fearful consumers, watching jobs vanish and their investments tank, have sharply cut back their spending, including big-ticket purchases like homes and cars that typically involve financing.

The negative forces have fed off each other, creating a vicious cycle that Bernanke and Treasury Secretary Henry Paulson have been desperately trying to break.

To unlock lending and get financial markets to operate more normally, the US has resorted to a string of radical actions, including a $700 billion (S$1 trillion) financial bailout where the government is making cash injections in banks in return for partial ownership stakes.

In terms of rate cuts, the Fed is getting ever closer to running out of ammunition.

It can lower the funds rate only so far - to zero. Even if that were to happen - a point of debate among economists - the prime rate would fall to 3 per cent but no lower.

Against that backdrop, Mr Bernanke says the central bank is exploring other ways to stimulate the economy.

The Fed could buy longer-term Treasury or agency securities on the open market in substantial quantities, Mr Bernanke says. This might lower rates on these securities and help spur buying appetites.

Another option the Fed has mulled: issuing its own debt, which would give the central bank cash and more flexibility to battle the financial crisis. To do that, however, the Fed would need new powers from Congress.

'The Fed wants to show that it has tools and options and is not out of tricks because interest rates are very low,' said Mr Michael Feroli, economist at JPMorgan Economics. 'The problems holding back the economy are fairly long lived in nature.'

To combat the financial crisis, the Fed already has created first-of-its-kind programmes, such as getting cash directly to companies by buying up mounds of 'commercial paper', the short-term debt firms use to pay everyday expenses such as payroll and supplies.

It also recently launched massive programs to boost the availability of consumer credit, including that for cars, student loans, homes and credit cards. The Fed also is making loans to banks, is providing a financial backstop to the mutual fund industry, and has injected billions of dollars in financial markets here and abroad. -- AP