WASHINGTON - FEDERAL Reserve policymakers opened a two-day meeting on Monday widely expected to take unprecedented action to cut key rates to near zero in the latest effort to battle a crippling credit crunch.

Yet analysts say low rates have so far failed to spark economic activity and that the central bank headed by Mr Ben Bernanke will likely look at a range of exceptional actions to get credit flowing again.

The central bank's Federal Open Market Committee (FOMC) was expected to cut its base lending rate from the current level of 1.0 per cent, even if the move would be largely symbolic.

The meeting opened on Monday and was set to conclude on Tuesday around 1915 GMT (3.15am Singapore time).

Futures market trading suggests a strong likelihood of a cut in the federal funds rate to as low as 0.25 per cent, which would represent a sharp cut of three-fourths of a point. Many analysts are anticipating a half-point cut, which still would be an all-time low for the rate.

But the Fed's low rates have not yet filtered into many consumer and business loans, and the central bank is likely to expand its arsenal of extraordinary actions to break the global credit crunch and avert a crippling deflationary spiral, say analysts.

'With all of its rate-cutting ammunition effectively spent - it is possible the funds rate could be cut to zero, but we believe this would cause undue strain in the money markets - the Fed will likely focus its efforts on unconventional policy options in its efforts to stabilise the economy and the financial markets,' said Mr Joseph LaVorgna, chief US economist at Deutsche Bank.

'We expect the Fed to cut the funds rate by 50 basis points to 0.50 per cent, a new record low. More important than the projected rate reduction will be what the communique says.'

The Fed is using a tool employed by Japan in the 1990s that economists call quantitative easing - which means the central bank is effectively 'printing money' to pump it into the system and stimulate lending.

Analysts say Mr Bernanke and other Fed members have not explicitly acknowledged the technique but will likely be forced to do so some time soon.

Complicating the Fed's task is a growing expectation of falling prices that could set off a deflationary spiral hard to counter.

The extraordinary actions on the bond market underscore the conundrum for the central bank.

Yields on some short-term Treasury bills became negative for the first time - meaning investors are willing to give up a bit of their capital for the safety of US government debt in view of a deflation threat.

At the same time, the Treasury in the past week issued US$30 billion (S$44.3 billion) in bills at a rate of zero per cent, highlighting the same fears.

The effective federal funds rate on the futures market has fallen near zero as well - as low as 0.0625 per cent - despite the Fed target of 1.0 per cent, because of the exceptional amounts of liquidity being pumped into the system.

'The Fed basically lost control of the rate after the Lehman Brothers failure on Sept 15,' said Professor Jeremy Siegel, a University of Pennsylvania economist and adviser to Rittenhouse Asset Management.

'With the effective real market rate now at zero, what difference does a cut make?' said Mr John Mauldin, president of Millennium Wave Advisors.

'I hope they do the right thing and go ahead and cut at least 75 basis points, if not more. That would stop the speculation and let them move on to quantitative easing and other allied policies.'

Wells Fargo economist Eugenio Aleman said the Fed must publicly address speculation in the media about its actions, including some reports that it would seek to target mortgage rates at 4.5 per cent, which he said is causing potential home buyers to wait for such efforts.

'This speculation is plain and simply delaying a recovery in the US housing market,' Mr Aleman said.

'This speculation has a similar effect to the speculation that the government is going to come to the rescue of all of those who made terrible investment decisions; it is just making things worse, not better.' -- AFP