Fed benchmark may be the model for central banks

San Francisco: The New Year will not bring cheer to the world's major economies, which face the aftershocks of a historic banking and credit crisis and a deep recession in the US and much of the globe.

The US Federal Reserve's breakthrough move to set its benchmark lending rate at zero to 0.25 per cent could become a model for other central banks.

The Bank of England is expected to lower its key rate on Thursday.

Highlights of the week's data calendar include US December auto sales yesterday and non-farm payrolls on Friday. European markets could grapple with a dose of deflation when consumer price data is revealed.

Still, the resolve to put a smiley face on the new calendar could be helped by money markets, which have at least made it through the looking glass to 2009 without a fresh crisis erupting, and change on the way in Washington.

"The recovery of the money market is most apparent in the downtrend in LIBOR [the London Interbank Offered Rate], which is collapsing and is set to collapse further," said Tony Crescenzi, chief bond market strategist at Miller Tabak.

Even with potential improvements in market mechanisms, many economists expect the first quarter of 2009 in the US to be at least as bleak as the final three months of 2008 appeared to be.

On Friday, the Labour Department is expected to report that roughly 500,000 more Americans lost their jobs in December.

That would push payroll losses in the fourth quarter alone to more than 1.3 million.

The jobless rate is forecast to rise to 6.9 per cent from 6.7 per cent, matching a level last seen in July 1993.

Now under way is a rapid reduction in the proportion of the US economy driven by consumer spending. Government spending is set to pick up the slack, in the form of a massive stimulus package from the incoming administration of Barack Obama.

"The government has to step in to fill the void ... in order to prevent a complete collapse of economic activity," said Eugenio Aleman, economist at Wells Fargo in Minneapolis.